Density approximations for multivariate affine jump-diffusion processes

Damir Filipović, Eberhard Mayerhofer, Paul Schneider

Research output: Contribution to journalArticlepeer-review

Abstract

We introduce closed-form transition density expansions for multivariate affine jump-diffusion processes. The expansions rely on a general approximation theory which we develop in weighted Hilbert spaces for random variables which possess all polynomial moments. We establish parametric conditions which guarantee existence and differentiability of transition densities of affine models and show how they naturally fit into the approximation framework. Empirical applications in option pricing, credit risk, and likelihood inference highlight the usefulness of our expansions. The approximations are extremely fast to evaluate, and they perform very accurately and numerically stable.

Original languageEnglish
Pages (from-to)93-111
Number of pages19
JournalJournal of Econometrics
Volume176
Issue number2
DOIs
Publication statusPublished - Oct 2013
Externally publishedYes

Keywords

  • Affine processes
  • Asymptotic expansion
  • Density approximation
  • Orthogonal polynomials

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