Linearity-generating processes
Subtitle: a modeling tool yielding closed forms for asset prices
By: Xavier Gabaix.
Contributors: National Bureau of Economic Research.
Series: NBER working paper series -- no. 13430.; Working paper series (National Bureau of Economic Research) -- working paper no. 13430.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 52
Subjects: Assets (Accounting) -- Prices -- Mathematical models
Description: 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.
Notes: "September 2007"

Includes bibliographical references (p. 40-44).

Also available in PDF from the NBER world wide web site (www.nber.org).