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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26292
Title: Linearity-Generating Processes: A Modelling Tool Yielding Closed Forms for Asset Prices
Authors: Gabaix, Xavier
Keywords: Modified Gordon growth model;Stochastic Discount Factor;Long term risk;Interest rate processes;Bond premia;Equity Premium
Issue Date: 10-Sep-2007
Series/Report no.: FIN-07-006
Abstract: This methodological paper presents a class of stochastic processes with appealing properties for theoretical or empirical work in finance and macroeconomics, the “linearity-generating” class. Its key property is that it yields simple exact closed-form expressions for stocks and bonds, with an arbitrary number of factors. It operates in discrete and continuous time. It has a number of economic modeling applications. These include macroeconomic situations with changing trend growth rates, or stochastic probability of disaster, asset pricing with stochastic risk premia or stochastic dividend growth rates, and yield curve analysis that allows flexibility and transparency. Many research questions may be addressed more simply and in closed form by using the linearity-generating class.
URI: http://hdl.handle.net/2451/26292
Appears in Collections:Finance Working Papers

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