On the Relation between Linearity-Generating Processes and Linear-Rational Models

Damir Filipović*, Martin Larsson, Anders Bjerre Trolle

*Corresponding author af dette arbejde

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Abstrakt

We review the notion of a linearity-generating (LG) process introduced by Gabaix and relate LG processes to linear-rational (LR) models studied by Filipović et al. We show that every LR model can be represented as an LG process and vice versa. We find that LR models have two basic properties that make them an important representation of LG processes. First, LR models can be easily specified and made consistent with nonnegative interest rates. Second, LR models go naturally with the long-term risk factorization due to Alvarez and Jermann, Hansen and Scheinkman, and Qin and Linetsky. Every LG process under the long forward measure can be represented as a lower dimensional LR model.
OriginalsprogEngelsk
TidsskriftMathematical Finance
Vol/bind29
Udgave nummer3
Sider (fra-til)804-826
Antal sider23
ISSN0960-1627
DOI
StatusUdgivet - jul. 2019
Udgivet eksterntJa

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