Risk-Neutral Parameter Shifts and Derivatives Pricing in Discrete Time
We obtain a large class of discrete-time risk-neutral valuation relationships, or "preference-free" derivatives pricing models, by imposing a simple restriction on the state-price density process. The risk-neutral stock-return and forward-rate dynamics are obtained by changing only a location parameter, which can be determined independent of the preference and true location parameters. The Gaussian models of <link rid="b20">Rubinstein (1976)</link>, <link rid="b3">Brennan (1979)</link>, and <link rid="b5">Câmera (2003)</link>, and the gamma model of <link rid="b9">Heston (1993)</link> are all special cases. The model provides simple relationships between expected returns and state-price density parameters analogous to the diffusion case. Copyright 2004 by The American Finance Association.
Year of publication: |
2004
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Authors: | SCHRODER, MARK |
Published in: |
Journal of Finance. - American Finance Association - AFA, ISSN 1540-6261. - Vol. 59.2004, 5, p. 2375-2402
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Publisher: |
American Finance Association - AFA |
Saved in:
freely available
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