CRIF Working Paper No. 02013

Asset Pricing under the Quadratic Class

Title: Asset Pricing under the Quadratic Class

Authors: Markus Leippold (University of Zurich) 

              Liuren Wu (Fordham University)

Contact: wu@fordham.edu

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.  

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Comments: The paper is forthcoming in Journal of Financial and Quantitative Analysis.