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Pricing and Inference with Mixtures of Conditionally Normal Processes

Author

Listed:
  • Bertholon, H.
  • Monfort, A.
  • Pegoraro, F.
Abstract
We consider the problems of derivative pricing and inference when the stochastic discount factor has an exponential-affine form and the geometric return of the underlying asset has a dynamics characterized by a mixture of conditionally Normal processes. We consider both the static case in which the underlying process is a white noise distributed as a mixture of Gaussian distributions (including extreme risks and jump diffusions) and the dynamic case in which the underlying process is conditionally distributed as a mixture of Gaussian laws. Semi-parametric, non parametric and Switching Regime situations are also considered. In all cases, the risk-neutral processes and explicit pricing formulas are obtained.

Suggested Citation

  • Bertholon, H. & Monfort, A. & Pegoraro, F., 2007. "Pricing and Inference with Mixtures of Conditionally Normal Processes," Working papers 188, Banque de France.
    • Handle: RePEc:bfr:banfra:188
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    More about this item

    Keywords

    Derivative Pricing ; Stochastic Discount Factor ; Implied Volatility; Mixture of Normal Distributions ; Mixture of Conditionally Normal Processes ; Nonparametric Kernel Estimation ; Mixed-Normal GARCH Processes ; Switching Regime Models.;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G1 - Financial Economics - - General Financial Markets

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