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Scientific article
Open access
English

Linear-quadratic jump-diffusion modeling

Published inMathematical finance, vol. 17, no. 4, p. 575-598
Publication date2007
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 character- ization 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 models
  • Affine models
  • Jump-diffusions
  • Generalized Fourier trans- form
  • Option pricing
Citation (ISO format)
CHENG, Peng, SCAILLET, Olivier. Linear-quadratic jump-diffusion modeling. In: Mathematical finance, 2007, vol. 17, n° 4, p. 575–598. doi: 10.1111/j.1467-9965.2007.00316.x
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ISSN of the journal0960-1627
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