Equilibrium asset pricing under the Lévy process with stochastic volatility and moment risk premiums

Xinfeng Ruan; Wenli Zhu; Jiexiang Huang; Jin E. Zhang

doi:10.1016/j.econmod.2015.12.030

Equilibrium asset pricing under the Lévy process with stochastic volatility and moment risk premiums

Xinfeng Ruan^*, Wenli Zhu, Jiexiang Huang, Jin E. Zhang

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

11 Citations (Scopus)

Abstract

In this paper, we extend Zhang, Zhao and Chang's (2012) production-based equilibrium asset pricing model from a jump diffusion setting to a Lévy process with stochastic volatility. This paper is a further extension of Fu and Yang (2012), which is under a Lévy process with a constant volatility. Using newly developed closed-form formulas of equity premium and pricing kernel, we are able to price Schouten's (2005) moment swaps analytically. Numerical results show that our pricing formula performs very well. Our model explains Zhao, Zhang and Chang's (2013) empirical observations on moment risk premiums.

Original language	English
Pages (from-to)	326-338
Number of pages	13
Journal	Economic Modelling
Volume	54
DOIs	https://doi.org/10.1016/j.econmod.2015.12.030
Publication status	Published - 1 Apr 2016
Externally published	Yes

Keywords

Equilibrium asset pricing
Lévy process
Moment risk premiums
Moment swaps
Stochastic volatility

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10.1016/j.econmod.2015.12.030

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title = "Equilibrium asset pricing under the L{\'e}vy process with stochastic volatility and moment risk premiums",

abstract = "In this paper, we extend Zhang, Zhao and Chang's (2012) production-based equilibrium asset pricing model from a jump diffusion setting to a L{\'e}vy process with stochastic volatility. This paper is a further extension of Fu and Yang (2012), which is under a L{\'e}vy process with a constant volatility. Using newly developed closed-form formulas of equity premium and pricing kernel, we are able to price Schouten's (2005) moment swaps analytically. Numerical results show that our pricing formula performs very well. Our model explains Zhao, Zhang and Chang's (2013) empirical observations on moment risk premiums.",

keywords = "Equilibrium asset pricing, L{\'e}vy process, Moment risk premiums, Moment swaps, Stochastic volatility",

author = "Xinfeng Ruan and Wenli Zhu and Jiexiang Huang and Zhang, {Jin E.}",

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doi = "10.1016/j.econmod.2015.12.030",

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T1 - Equilibrium asset pricing under the Lévy process with stochastic volatility and moment risk premiums

AU - Ruan, Xinfeng

AU - Zhu, Wenli

AU - Huang, Jiexiang

AU - Zhang, Jin E.

PY - 2016/4/1

Y1 - 2016/4/1

N2 - In this paper, we extend Zhang, Zhao and Chang's (2012) production-based equilibrium asset pricing model from a jump diffusion setting to a Lévy process with stochastic volatility. This paper is a further extension of Fu and Yang (2012), which is under a Lévy process with a constant volatility. Using newly developed closed-form formulas of equity premium and pricing kernel, we are able to price Schouten's (2005) moment swaps analytically. Numerical results show that our pricing formula performs very well. Our model explains Zhao, Zhang and Chang's (2013) empirical observations on moment risk premiums.

AB - In this paper, we extend Zhang, Zhao and Chang's (2012) production-based equilibrium asset pricing model from a jump diffusion setting to a Lévy process with stochastic volatility. This paper is a further extension of Fu and Yang (2012), which is under a Lévy process with a constant volatility. Using newly developed closed-form formulas of equity premium and pricing kernel, we are able to price Schouten's (2005) moment swaps analytically. Numerical results show that our pricing formula performs very well. Our model explains Zhao, Zhang and Chang's (2013) empirical observations on moment risk premiums.

KW - Equilibrium asset pricing

KW - Lévy process

KW - Moment risk premiums

KW - Moment swaps

KW - Stochastic volatility

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DO - 10.1016/j.econmod.2015.12.030

M3 - Article

AN - SCOPUS:84957876005

SN - 0264-9993

VL - 54

SP - 326

EP - 338

JO - Economic Modelling

JF - Economic Modelling

ER -

Equilibrium asset pricing under the Lévy process with stochastic volatility and moment risk premiums

Abstract

Keywords

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