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Asset Pricing under the Quadratic Class

Published online by Cambridge University Press:  06 April 2009

Markus Leippold  and
Liuren Wu
Markus Leippold
Affiliation:
[email protected], Swiss Banking Institute, University of Zürich, Plattenstr. 14, 8032 Zürich, Switzerland
Liuren Wu
Affiliation:
[email protected], Graduate School of Business, Fordham University, 113 West 60th Street, New York, NY 10023.
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Abstract

We identify and characterize a class of term structure models where bond yields are quadratic functions of the state vector. We label this class the quadratic class and aim to lay a solid theoretical foundation for its future empirical application. We consider asset pricing in general and derivative pricing in particular under the quadratic class. We provide two general transform methods in pricing a wide variety of fixed income derivatives in closed or semi-closed form. We further illustrate how the quadratic model and the transform methods can be applied to more general settings.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 37 , Issue 2 , June 2002 , pp. 271 - 295
Copyright
Copyright © School of Business Administration, University of Washington 2002

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