NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Multifrequency Jump-Diffusions: An Equilibrium Approach

Laurent E. Calvet, Adlai J. Fisher

NBER Working Paper No. 12797
Issued in December 2006
NBER Program(s):   EFG

This paper proposes that equilibrium valuation is a powerful method to generate endogenous jumps in asset prices, which provides a structural alternative to traditional reduced-form specifications with exogenous discontinuities. We specify an economy with continuous consumption and dividend paths, in which endogenous price jumps originate from the market impact of regime-switches in the drifts and volatilities of fundamentals. We parsimoniously incorporate shocks of heterogeneous durations in consumption and dividends while keeping constant the number of parameters. Equilibrium valuation creates an endogenous relation between a shock's persistence and the magnitude of the induced price jump. As the number of frequencies driving fundamentals goes to infinity, the price process converges to a novel stochastic process, which we call a multifractal jump-diffusion.

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Document Object Identifier (DOI): 10.3386/w12797

Published: Calvet, Laurent E. & Fisher, Adlai J., 2008. "Multifrequency jump-diffusions: An equilibrium approach," Journal of Mathematical Economics, Elsevier, vol. 44(2), pages 207-226, January. citation courtesy of

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