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Stochastic Deflator for an Economic Scenario Generator with Five Factors

Author

Listed:
  • Po-Keng Cheng

    (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

  • Frédéric Planchet

    (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

Abstract

In this paper, we implement a stochastic deflator with five economic and financial risk factors: interest rates, market price of risk, stock prices, default intensities, and convenience yields. We examine the deflator with different financial assets, such as stocks, zero‐coupon bonds, vanilla options, and corporate coupon bonds. We find required regularity conditions to implement our stochastic deflator. Our numerical results show the reliability of the deflator approach in pricing financial derivatives.

Suggested Citation

  • Po-Keng Cheng & Frédéric Planchet, 2019. "Stochastic Deflator for an Economic Scenario Generator with Five Factors," Working Papers hal-01730072, HAL.
    • Handle: RePEc:hal:wpaper:hal-01730072
    Note: View the original document on HAL open archive server: https://hal.science/hal-01730072v4
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