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A New Class Of Asset Pricing Models With L?vy Processes: Theory And Applications

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Executive Summary

The authors develop a new class of discrete-time asset pricing models with L?vy processes and use a? ne GARCH dynamics to drive the models’ time variation. These models are easy to implement and can capture three important stylized facts of asset returns, which are non-normality, time-varying return volatility, and the leverage effect. In addition, this framework yields asset return dynamics that have affine structure in their conditional transform, which leads to simple valuation of various derivatives including zero-coupon bonds and European options.

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