Sensitivity analysis of long-term cash flows. (English) Zbl 1416.91382
Summary: This paper conducts a sensitivity analysis of long-term cash flows. The price of the cash flow at time zero is given by the pricing operator of a Markov diffusion acting on the cash flow function. We study the extent to which the price of the cash flow is affected by small perturbations of the underlying Markov diffusion. The main tool is the Hansen-Scheinkman decomposition, which is a method to express the cash flow in terms of eigenvalues and eigenfunctions of the pricing operator. By incorporating techniques developed by E. Fournié et al. [Finance Stoch. 3, No. 4, 391–412 (1999; Zbl 0947.60066)], the sensitivities of long-term cash flows can be represented via simple expressions in terms of eigenvalues and eigenfunctions.
MSC:
| 91G20 | Derivative securities (option pricing, hedging, etc.) |
| 60J70 | Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) |
Citations:
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