TY  - JOUR
AU  - Gabaix,Xavier
TI  - Linearity-Generating Processes: A Modelling Tool Yielding Closed Forms for Asset Prices
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13430
PY  - 2007
Y2  - September 2007
UR  - http://www.nber.org/papers/w13430
L1  - http://www.nber.org/papers/w13430.pdf
N1  - Author contact info:
Xavier Gabaix
New York University
Finance Department
Stern School of Business
44 West 4th Street, 9th floor
New York, NY 10012
Tel: 212-998-0257
Fax: 212-995-4233
E-Mail: xgabaix@stern.nyu.edu
AB  - 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.
ER  -