Positive eigenfunctions of Markovian pricing operators: Hansen-Scheinkman factorization, Ross recovery, and long-term pricing

DOI10.1287/OPRE.2015.1449zbMATH Open1338.90447DBLPjournals/ior/QinL16arXiv1411.3075OpenAlexW3125066934WikidataQ88648365 ScholiaQ88648365MaRDI QIDQ2806062FDOQ2806062

Authors: Likuan Qin, Vadim Linetsky 

Publication date: 13 May 2016

Published in: Operations Research (Search for Journal in Brave)

Abstract: This paper develops a spectral theory of Markovian asset pricing models where the underlying economic uncertainty follows a continuous-time Markov process X with a general state space (Borel right process (BRP)) and the stochastic discount factor (SDF) is a positive semimartingale multiplicative functional of X. A key result is the uniqueness theorem for a positive eigenfunction of the pricing operator such that X is recurrent under a new probability measure associated with this eigenfunction (recurrent eigenfunction). As economic applications, we prove uniqueness of the Hansen and Scheinkman (2009) factorization of the Markovian SDF corresponding to the recurrent eigenfunction, extend the Recovery Theorem of Ross (2015) from discrete time, finite state irreducible Markov chains to recurrent BRPs, and obtain the long maturity asymptotics of the pricing operator. When an asset pricing model is specified by given risk-neutral probabilities together with a short rate function of the Markovian state, we give sufficient conditions for existence of a recurrent eigenfunction and provide explicit examples in a number of important financial models, including affine and quadratic diffusion models and an affine model with jumps. These examples show that the recurrence assumption, in addition to fixing uniqueness, rules out unstable economic dynamics, such as the short rate asymptotically going to infinity or to a zero lower bound trap without possibility of escaping.

Full work available at URL: https://arxiv.org/abs/1411.3075

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zbMATH Keywords

Markov processesasset pricing

Mathematics Subject Classification ID

Corporate finance (dividends, real options, etc.) (91G50) Markov and semi-Markov decision processes (90C40)

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• Forecasting market index volatility using ross-recovered distributions
• Probabilistic analysis of replicator–mutator equations
• Sensitivity analysis of long-term cash flows
• Ross recovery with recurrent and transient processes
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• The unit root property and optimality with a continuum of states -- pure exchange
• LONG-TERM GROWTH RATE OF EXPECTED UTILITY FOR LEVERAGED ETFs: MARTINGALE EXTRACTION APPROACH
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