Solving asset pricing models with stochastic volatility

Oliver de Groot*

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    5 Citations (Scopus)
    2 Downloads (Pure)


    This paper provides a closed-form solution for the price-dividend ratio in a standard asset pricing model with stochastic volatility. The growth rate of the endowment is a first-order Gaussian autoregression, while the stochastic volatility innovations can be drawn from any distribution for which the moment-generating function exists. The solution is useful in allowing comparisons among numerical methods used to approximate the nontrivial closed form. The closed-form solution reveals that, when using perturbation methods around the deterministic steady state, the approximate solution needs to be sixth-order accurate in order for the parameter capturing the conditional standard deviation of the stochastic volatility process to be present.

    Original languageEnglish
    Pages (from-to)308-321
    Number of pages14
    JournalJournal of Economic Dynamics and Control
    Early online date10 Jan 2015
    Publication statusPublished - Mar 2015


    • Endowment model
    • Price-dividend ratio
    • Closed-form solution
    • Numerical methods


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