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Center for Economic Research Discussion Papers

Persistent link for this collectionhttps://hdl.handle.net/11299/54175

This series of discussion papers arose from seminars and research conducted at the Center for Economic Research and includes work by three Nobel Prize in Economics laureates.

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Browsing Center for Economic Research Discussion Papers by Subject "C61"

Now showing 1 - 2 of 2
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    Consumption-Based CAPM and Option Pricing under Jump-Diffusion Uncertainty
    (Center for Economic Research, Department of Economics, University of Minnesota, 2003-04) Kusuda, Koji
    In Kusuda [45], we developed equilibrium analysis in security market economy with jump-Wiener information where no finite number of securities can complete markets. Assuming approximately complete markets (Bjork et al. [11] [12]) in which a continuum of bonds are traded and any contingent claim can be replicated with an arbitrary precision, we have shown sufficient conditions for the existence of approximate security market equilibrium, in which every agent is allowed to choose any consumption plan that can be supported with any prescribed precision. In this paper, we derive the Consumption-Based Capital Asset Pricing Model (CCAPM) using the framework in case of heterogeneous with additively separable utilities (ASUs) and of homogeneous agents with a common stochastic differential utility (SDU). The CCAPM says that the risk premium between a risky security and the nominal-risk-free security can be decomposed into two groups of terms. One is related to the price fluctuation of the risky security, and the other is related to that of commodity. Each group can be further decomposed into two terms related to consumption volatility and consumption jump in case of ASUs, and into three terms related to consumption volatility, continuation utility volatility, and jumps of consumption and continuation utility in case of SDU. Next, we present a general equilibrium framework of jump-diffusion option pricing models in each case of heterogeneous agents with CRRA utilities and of homogeneous agents with a common Kreps-Porteus utility. Finally, we construct a general equilibrium version of an affine jump-diffusion model with jump-diffusion volatility for option pricing using the framework.
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    Infinite-Horizon Optimal Hedging Under Cone Constraints
    (Center for Economic Research, Department of Economics, University of Minnesota, 1999-01) Huang, Kevin Xiaodong
    We address the issue of hedging in infinite horizon markets with a type of constraints that the set of feasible portfolio holdings forms a convex cone. We show that the minimum cost of hedging a liability stream is equal to its largest present value with respect to admissible stochastic discount factors, thus can be determined without finding an optimal hedging strategy. We solve for an optimal hedging strategy by solving a sequence of independent one-period hedging problems. We apply the results to a variety of trading restrictions and also show how the admissible stochastic discount factors can be characterized.