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    Equilibrium approach of asset and option pricing under Lévy process and stochastic volatility

    Access Status
    Fulltext not available
    Authors
    Li, S.
    Zhou, Y.
    Wu, Yong Hong
    Ge, X.
    Date
    2017
    Type
    Journal Article
    
    Metadata
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    Citation
    Li, S. and Zhou, Y. and Wu, Y.H. and Ge, X. 2017. Equilibrium approach of asset and option pricing under Lévy process and stochastic volatility. Australian Journal of Management. 42 (2): pp. 276-295.
    Source Title
    Australian Journal of Management
    DOI
    10.1177/0312896215619966
    ISSN
    0312-8962
    School
    Department of Mathematics and Statistics
    URI
    http://hdl.handle.net/20.500.11937/54528
    Collection
    • Curtin Research Publications
    Abstract

    This paper studies the equity premium and option pricing under the general equilibrium framework taking into account stochastic volatility. We establish analytical expressions for the equity premium and pricing kernel of the stock process. Moreover, the equilibrium option pricing formula is derived by the Fourier transformation method. Numerical results show that our model is superior to the previous model with constant volatility in explaining some financial phenomena, such as negative variance risk premium, implied volatilities and negative skewness risk premium. As the price of the underlying asset is modeled as the exponential of the Lévy process with stochastic volatility, our model is more general than the existing equilibrium pricing models.

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