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Pricing stock and bond derivatives with a multi-factor Gaussian model

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  • Isabelle Bajeux-Besnainou
  • Roland Portait

Abstract

The martingale approach to pricing contingent claims can be applied in a multiple state variable model. The idea is used to derive the prices of derivative securities (futures on stock and bond futures, options on stocks, bonds and futures) given a continuous time Gaussian multi-factor model of the returns of stocks and bonds. The bond market is similar to Langetieg's multi-factor model, which has closed-form solutions. This model is a generalization of Vasicek's model, where the term structure depends on state variables following correlated mean reverting processes. The stock market is affected by systematic and unsystematic risk.

Suggested Citation

  • Isabelle Bajeux-Besnainou & Roland Portait, 1998. "Pricing stock and bond derivatives with a multi-factor Gaussian model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 5(3-4), pages 207-225.
    • Handle: RePEc:taf:apmtfi:v:5:y:1998:i:3-4:p:207-225
    DOI: 10.1080/135048698334646
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    References listed on IDEAS

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