Discrete Time Linear-quadratic Pricing of Bonds and Options

M. Realdon

doi:10.1080/09603107.2010.533960

Discrete Time Linear-quadratic Pricing of Bonds and Options

M. Realdon

Economics

Research output: Contribution to journal › Article › peer-review

Abstract

This article presents a discrete time pricing model whereby prices are either exponential linear-quadratic functions of stochastic factors or transforms of such exponential linear-quadratic functions. The model is applied to price default-free bonds and stock options under stochastic volatility and is the discrete time counterpart of the continuous time Linear Quadratic (LQ) model of Cheng and Scaillet (2007). In discrete time, the factors are conditionally Gaussian and market prices of risk can be specified with much freedom.

Original language	English
Pages (from-to)	463-467
Number of pages	5
Journal	Applied Financial Economics
Volume	21
Issue number	7-9
DOIs	https://doi.org/10.1080/09603107.2010.533960
Publication status	Published - Apr 2011

Bibliographical note

M1 - 7

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10.1080/09603107.2010.533960

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Discrete Time Linear-quadratic Pricing of Bonds and Options

Abstract

Bibliographical note

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