Asset Pricing in a Two-Country Discontinuous General Equilibrium Model

Ciprian Necula

No 24, Advances in Economic and Financial Research - DOFIN Working Paper Series from Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB

Abstract: The aim of this paper is to develop a framework for asset pricing in a continuous time general equilibrium model for a two country Lucas type economy. The model assumes that the output in the two countries follows a jump-diffusion stochastic process characterized by constant growth rates and volatilities and by log-normal amplitude of the jumps. Using this specification we deduce the fundamental evaluation equations for financial assets as well as a formula for the price of exchange rate options in this economy.

Keywords: general equilibrium model; two-country Lucas economy; exchange rate; risk premium; jump-diffusion (search for similar items in EconPapers)
JEL-codes: C02 C61 D50 G12 (search for similar items in EconPapers)
Date: 2008-12
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Citations: View citations in EconPapers (1)

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