A class of asset pricing models governed by subordinate processes that signal economic shocks

Raj Jagannathan

Journal of Economic Dynamics and Control, 2008, vol. 32, issue 12, 3820-3846

Abstract: We consider a mean-reverting risk-neutral short rate process model with a vector of subordinated drift processes that accounts for the random effect of the arrival of new information. It is assumed that the market is efficient with no arbitrage opportunities. Closed form expressions for the price in nominal and in real terms of a discount bond are obtained. We define a risk-neutral exchange rate model with correlated subordinated drift and volatility processes that reflect the effect of the arrival of new information pertaining to the countries involved. The cases of complete and incomplete exchange markets with no arbitrage opportunities are considered.

Keywords: Mean; reverting; Ito; process; Stochastic; volatility; Economic; shock; process; Risk; premia; Stochastic; interest; rate; Risk-neutral; process; Subordinated; processes; Brownian; motion; models; Foreign; exchange; markets; Incomplete/complete; markets (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:32:y:2008:i:12:p:3820-3846

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