Asset pricing under information with stochastic volatility
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Based on a general specification of the asset specific pricing kernel, we develop a pricing model using an information process with stochastic volatility. We derive analytical asset and option pricing formulas. The asset prices in this rational expectations model exhibit crash-like, strong downward movements. The resulting option pricing formula is consistent with the strong negative skewness and high levels of kurtosis observed in empirical studies. Furthermore, we determine credit spreads in a simple structural model.
KeywordsPricing kernel Stochastic volatility Asset pricing Option pricing Credit spreads
JEL ClassificationsG12 G13
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