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Linear-Quadratic Jump-Diffusion Modeling

Cheng, P.
Year 2006
Collection Cahiers de recherche; 2006.02
Abstract We aim at accommodating the existing affine jump-diffusion and quadratic models under the same roof, namely the linear-quadratic jump-diffusion (LQJD) class. We give a complete characterization of the dynamics of this class by stating explicitly the structural constraints, as well as the admissibility conditions. This allows us to carry out a specification analysis for the 3-factor LQJD models. We compute the standard transform of the state vector relevant to asset pricing up to a system of ordinary differential equations. We show that the LQJD class can be embedded into the affine class through use of an augmented state vector. This establishes a one-to-one equivalence relationship between both classes in terms of transform analysis.
Keywords Linear-quadratic modelsAffine modelsJump-diffusionsGeneralized Fourier transformOption pricing
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CHENG, P., SCAILLET, Olivier. Linear-Quadratic Jump-Diffusion Modeling. 2006 https://archive-ouverte.unige.ch/unige:5748

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Deposited on : 2010-04-15

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