Equilibruim approach of asset pricing under Lévy process

Jun Fu and Hailiang Yang

European Journal of Operational Research, 2012, vol. 223, issue 3, 701-708

Abstract: This work considers the equilibrium approach of asset pricing for Lévy process. It derives the equity premium and pricing kernel analytically for the stock price process, obtains an equilibrium option pricing formula, and explains some empirical evidence such as the negative variance risk premium, implied volatility smirk, and negative skewness risk premium by comparing the physical and risk-neutral distributions of the log return. Different from most of the current studies in equilibrium pricing under jump diffusion models, this work models the underlying asset price as the exponential of a Lévy process and thus allows nearly an arbitrage distribution of the jump component.

Keywords: Pricing; Equilibrium approach; Lévy process; Equity risk premium; Variance risk premium (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:223:y:2012:i:3:p:701-708

DOI: 10.1016/j.ejor.2012.06.037

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