Pricing stock and bond derivatives with a multi-factor Gaussian model

Isabelle Bajeux-Besnainou and Roland Portait

Applied Mathematical Finance, 1998, vol. 5, issue 3-4, 207-225

Abstract: The martingale approach to pricing contingent claims can be applied in a multiple state variable model. The idea is used to derive the prices of derivative securities (futures on stock and bond futures, options on stocks, bonds and futures) given a continuous time Gaussian multi-factor model of the returns of stocks and bonds. The bond market is similar to Langetieg's multi-factor model, which has closed-form solutions. This model is a generalization of Vasicek's model, where the term structure depends on state variables following correlated mean reverting processes. The stock market is affected by systematic and unsystematic risk.

Keywords: Derivative Securities; Multi-factor Model; Continuous-time; Pricing (search for similar items in EconPapers)
Date: 1998
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DOI: 10.1080/135048698334646

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