NDLI: Numerical Approach to Asset Pricing Models with Stochastic Differential Utility

Content Provider	Springer Nature Link
Author	Nakamura, buhiro
Copyright Year	2006
Abstract	In this paper employing two heuristic numerical schemes, we study the asset pricing models with stochastic differential utility (SDU), which is formulated by either of backward stochastic differential equations (BSDEs) or forward-backward stochastic differential equations (FBSDEs).The first scheme is based upon a traditional lattice algorithm of option pricing theories, involving the discretization scheme of coupled FBSDEs, which is combined with a technique of solving numerically a certain type of nonlinear equations with respect to the backward state variables. The second one is based upon the four step scheme of Ma et al. (1994) which solves quasi-linear partial differential equations associated with the FBSDEs. We demonstrate that our practical implementation algorithms can successfully solve the asset pricing models with generalized SDU and the large investor problem with market impact which are typical examples such that the usual four step scheme is difficult to implement. As other numerical applications we study the optimal consumption and investment policies of a representative agent with SDU, and the recoverability of preferences and beliefs from observed consumption data.
Starting Page	267
Ending Page	300
Page Count	34
File Format	PDF
ISSN	13872834
Journal	Asia-Pacific Financial Markets
Volume Number	11
Issue Number	3
e-ISSN	15736946
Language	English
Publisher	Kluwer Academic Publishers-Plenum Publishers
Publisher Date	2006-07-07
Publisher Place	New York
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	stochastic differential utility forward-backward stochastic differential equation lattice algorithm four step scheme Finance /Banking Financial Economics International Economics Economic Theory Econometrics
Content Type	Text
Resource Type	Article
Subject	Finance

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