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Article: Equilibrium asset and option pricing under jump diffusion

TitleEquilibrium asset and option pricing under jump diffusion
Authors
KeywordsAsset pricing
Equity risk premium
Jump diffusion
Option pricing
Variance risk premium
Issue Date2012
PublisherWiley-Blackwell Publishing, Inc.. The Journal's web site is located at http://www.wiley.com/bw/journal.asp?ref=0960-1627
Citation
Mathematical Finance, 2012, v. 22 n. 3, p. 538-568 How to Cite?
AbstractThis paper develops an equilibrium asset and option pricing model in a production economy under jump diffusion. The model provides analytical formulas for an equity premium and a more general pricing kernel that links the physical and risk-neutral densities. The model explains the two empirical phenomena of the negative variance risk premium and implied volatility smirk if market crashes are expected. Model estimation with the S&P 500 index from 1985 to 2005 shows that jump size is indeed negative and the risk aversion coefficient has a reasonable value when taking the jump into account. © 2010 Wiley Periodicals, Inc.
Persistent Identifierhttp://hdl.handle.net/10722/153400
ISSN
2015 Impact Factor: 2.283
2015 SCImago Journal Rankings: 1.671
ISI Accession Number ID
Funding AgencyGrant Number
Research Grants Council of the Hong Kong Special Administrative Region, ChinaHKU 7403/06H
HKU 7179/07E
HKU 7549/09H
Funding Information:

This paper was previously circulated under the title "Asset Pricing under Jump Diffusion" (Zhang and Zhao 2006). We are especially grateful to an anonymous referee for valuable comments and suggestions. We also acknowledge helpful comments from Andrew Carverhill, Min Dai, Jin-Chuan Duan, Nengjiu Ju, Jun Liu (our CICF discussant), Chenghu Ma, Dilip Madan (managing editor), Rujing Meng, Jun Pan, Yanmin Qian, Duo Wang, Keith Wong, Junxi Zhang, Xiaoqian Zhang, Yingzi Zhu, and seminar participants at the University of Hong Kong (HKU), Shanghai Jiao Tong University, Zhejiang University, Central University of Finance and Economics, Tsinghua University, Peking University, National University of Singapore, Quantitative Methods in Finance Conference (QMF) 2006 in Sydney, Asian Finance Association/Financial Management Association Annual Meeting 2007 in Hong Kong, and 2007 China International Conference in Finance (CICF 2007) in Chengdu. Jin E. Zhang has benefited from interesting discussions with Stephen Ching, Stephen Chiu, Nan Li, Tiecheng Li, Tao Lin, Stephen Ross, C.Y. Tse, Oldrich Vasicek, Jiang Wang, and Hong Yan. The research of this paper was partially supported by grants from the Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. HKU 7403/06H, HKU 7179/07E and HKU 7549/09H).

References
Grants

 

DC FieldValueLanguage
dc.contributor.authorZhang, JEen_HK
dc.contributor.authorZhao, Hen_HK
dc.contributor.authorChang, ECen_HK
dc.date.accessioned2012-07-16T10:13:03Z-
dc.date.available2012-07-16T10:13:03Z-
dc.date.issued2012en_HK
dc.identifier.citationMathematical Finance, 2012, v. 22 n. 3, p. 538-568en_HK
dc.identifier.issn0960-1627en_HK
dc.identifier.urihttp://hdl.handle.net/10722/153400-
dc.description.abstractThis paper develops an equilibrium asset and option pricing model in a production economy under jump diffusion. The model provides analytical formulas for an equity premium and a more general pricing kernel that links the physical and risk-neutral densities. The model explains the two empirical phenomena of the negative variance risk premium and implied volatility smirk if market crashes are expected. Model estimation with the S&P 500 index from 1985 to 2005 shows that jump size is indeed negative and the risk aversion coefficient has a reasonable value when taking the jump into account. © 2010 Wiley Periodicals, Inc.en_HK
dc.languageengen_US
dc.publisherWiley-Blackwell Publishing, Inc.. The Journal's web site is located at http://www.wiley.com/bw/journal.asp?ref=0960-1627en_HK
dc.relation.ispartofMathematical Financeen_HK
dc.subjectAsset pricingen_HK
dc.subjectEquity risk premiumen_HK
dc.subjectJump diffusionen_HK
dc.subjectOption pricingen_HK
dc.subjectVariance risk premiumen_HK
dc.titleEquilibrium asset and option pricing under jump diffusionen_HK
dc.typeArticleen_HK
dc.identifier.emailZhang, JE: jinzhang@hku.hken_HK
dc.identifier.emailChang, EC: ecchang@hku.hken_HK
dc.identifier.authorityZhang, JE=rp01125en_HK
dc.identifier.authorityChang, EC=rp01050en_HK
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1111/j.1467-9965.2010.00468.xen_HK
dc.identifier.scopuseid_2-s2.0-84861999199en_HK
dc.identifier.hkuros172399en_US
dc.identifier.hkuros201031-
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-84861999199&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume22en_HK
dc.identifier.issue3en_HK
dc.identifier.spage538en_HK
dc.identifier.epage568en_HK
dc.identifier.eissn1467-9965-
dc.identifier.isiWOS:000304902600006-
dc.publisher.placeUnited Statesen_HK
dc.relation.projectThe price impacts of imposing short-sales constraints-
dc.identifier.scopusauthoridZhang, JE=7601346659en_HK
dc.identifier.scopusauthoridZhao, H=7404778848en_HK
dc.identifier.scopusauthoridChang, EC=7401837661en_HK

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