Pricing and Inference with Mixtures of Conditionally Normal Processes

Henri Bertholon, Alain Monfort and Fulvio Pegoraro ()
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Henri Bertholon: Crest

No 2006-28, Working Papers from Center for Research in Economics and Statistics

Abstract: We consider the problems of derivative pricing and inference when the stochastic discount factor has an exponentialaffineform and the geometric return of the underlying asset has a dynamics characterized by a mixture of conditionallyNormal processes. We consider both the static case in which the underlying process is a white noise distributed as amixture of Gaussian distributions (including extreme risks and jump diffusions) and the dynamic case in which theunderlying process is conditionally distributed as a mixture of Gaussian laws. Semi-parametric, non parametric andSwitching Regime situations are also considered. In all cases, the risk-neutral processes and explicit pricing formulasare obtained.

Pages: 53
Date: 2006
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Citations: View citations in EconPapers (34)

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Working Paper: Pricing and Inference with Mixtures of Conditionally Normal Processes (2007)
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