Publication

Polynomial Jump-Diffusion Models

Damir Filipovic, Martin Larsson
2020
Journal Articles

Abstract

We develop a comprehensive mathematical framework for polynomial jump-diffusions in a semimartingale context, which nest affine jump-diffusions and have broad applications in finance. We show that the polynomial property is preserved under polynomial transformations and Lévy time change. We present a generic method for option pricing based on moment expansions. As an application, we introduce a large class of novel financial asset pricing models with excess log returns that are conditional Lévy based on polynomial jump-diffusions.

Official source

https://infoscience.epfl.ch/entities/publication/90f09c9a-afda-492a-aca1-6faf2933e564

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Damir Filipovic, Martin Larsson
2020
Journal Articles

Abstract

Official source

https://infoscience.epfl.ch/entities/publication/90f09c9a-afda-492a-aca1-6faf2933e564

About this result

Ontological neighbourhood

Economics

Microeconomics: Financial economics

Related concepts (22)

Asset pricing

In financial economics, asset pricing refers to a formal treatment and development of two main pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, but correspondingly, these stem from either general equilibrium asset pricing or rational asset pricing, the latter corresponding to risk neutral pricing.

Capital asset pricing model

In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.

Option (finance)

In finance, an option is a contract which conveys to its owner, the holder, the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified date, depending on the style of the option. Options are typically acquired by purchase, as a form of compensation, or as part of a complex financial transaction.

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