Working Paper: NBER ID: w7105
Authors: Darrell Duffie; Jun Pan; Kenneth Singleton
Abstract: In the setting of affine' jump-diffusion state processes, this paper provides an analytical treatment of a class of transforms, including various Laplace and Fourier transforms as special cases, that allow an analytical treatment of a range of valuation and econometric problems. Example applications include fixed-income pricing models, with a role for intensityy-based models of default, as well as a wide range of option-pricing applications. An illustrative example examines the implications of stochastic volatility and jumps for option valuation. This example highlights the impact on option 'smirks' of the joint distribution of jumps in volatility and jumps in the underlying asset price, through both amplitude as well as jump timing.
Keywords: Affine Jump-Diffusion; Asset Pricing; Fixed-Income Pricing; Option Pricing
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| extended transform (Y60) | pricing efficiency (D61) |
| extended transform (Y60) | closed-form expressions for pricing of zero-coupon bonds (G12) |
| stochastic intensity (C58) | default risk modeling (G33) |
| joint distribution of jumps in volatility and asset prices (C46) | option smirks (Y60) |
| affine jump-diffusion processes (C69) | pricing of future cash flows (G13) |