Equilibrium asset pricing under the Lévy process with stochastic volatility and moment risk premiums |
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| Institution: | 1. Department of Accountancy and Finance, Otago Business School, University of Otago, Dunedin 9054, New Zealand;2. School of Economic Mathematics, Southwestern University of Finance and Economics, Chengdu 611130, P.R. China;1. China Academy of Public Finance and Public Policy, Central University of Finance and Economics, 39 South College Rd., Beijing 100081, China;2. School of Economics, Renmin University of China, 59 Zhongguancun St., Beijing 100872, China;1. Department of Economics, Deakin University, 70 Elgar Road, LB 4.421, Burwood, VIC, Australia;2. Department of Economics, Monash University, 900 Dandenong Road, Caulfield East, VIC, Australia;3. Department of Economics, University of Leicester, Leicester LE1 7RH, United Kingdom |
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| Abstract: | In this paper, we extend Zhang, Zhao and Chang's (2012) production-based equilibrium asset pricing model from a jump diffusion setting to a Lévy process with stochastic volatility. This paper is a further extension of Fu and Yang (2012), which is under a Lévy process with a constant volatility. Using newly developed closed-form formulas of equity premium and pricing kernel, we are able to price Schouten's (2005) moment swaps analytically. Numerical results show that our pricing formula performs very well. Our model explains Zhao, Zhang and Chang's (2013) empirical observations on moment risk premiums. |
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