Multifrequency Jump-Diffusions: An Equilibrium Approach / Laurent E. Calvet, Adlai J. Fisher.

Format:

Book

Author/Creator:

Calvet, Laurent E.

Contributor:

National Bureau of Economic Research.

Fisher, Adlai J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12797.

NBER working paper series no. w12797

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Multifrequency Jump-Diffusions

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Summary:

This paper proposes that equilibrium valuation is a powerful method to generate endogenous jumps in asset prices, which provides a structural alternative to traditional reduced-form specifications with exogenous discontinuities. We specify an economy with continuous consumption and dividend paths, in which endogenous price jumps originate from the market impact of regime-switches in the drifts and volatilities of fundamentals. We parsimoniously incorporate shocks of heterogeneous durations in consumption and dividends while keeping constant the number of parameters. Equilibrium valuation creates an endogenous relation between a shock's persistence and the magnitude of the induced price jump. As the number of frequencies driving fundamentals goes to infinity, the price process converges to a novel stochastic process, which we call a multifractal jump-diffusion.

Notes:

Print version record

December 2006.