Multifrequency Jump-Diffusions: An Equilibrium Approach

Laurent Calvet and Adlai Fisher

No 12797, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper proposes that equilibrium valuation is a powerful method to generate endogenous jumps in asset prices, which provides a structural alternative to traditional reduced-form specifications with exogenous discontinuities. We specify an economy with continuous consumption and dividend paths, in which endogenous price jumps originate from the market impact of regime-switches in the drifts and volatilities of fundamentals. We parsimoniously incorporate shocks of heterogeneous durations in consumption and dividends while keeping constant the number of parameters. Equilibrium valuation creates an endogenous relation between a shock's persistence and the magnitude of the induced price jump. As the number of frequencies driving fundamentals goes to infinity, the price process converges to a novel stochastic process, which we call a multifractal jump-diffusion.

JEL-codes: C5 D53 G0 G12 (search for similar items in EconPapers)
Date: 2006-12
Note: EFG
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Published as Calvet, Laurent E. & Fisher, Adlai J., 2008. "Multifrequency jump-diffusions: An equilibrium approach," Journal of Mathematical Economics, Elsevier, vol. 44(2), pages 207-226, January.

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Related works:
Journal Article: Multifrequency jump-diffusions: An equilibrium approach (2008)
Working Paper: Multifrequency jump-diffusions: An equilibrium approach (2008)
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