Equilibrium asset pricing under the Lévy process with stochastic volatility and moment risk premiums

- We build a general equilibrium model for asset pricing in a production economy.
- We identify the characteristics of the equity premium and the pricing kernel.
- We provide analytical formulas for moment swaps and moment risk premiums.
- We find that the variance risk premium and kurtosis risk premium are negative.
- We find that the risk-neutral skewness is more negative than the physical skewness.

In this paper, we extend Zhang, Zhao and Chang's (2012) production-based equilibrium asset pricing model from a jump diffusion setting to a Lévy process with stochastic volatility. This paper is a further extension of Fu and Yang (2012), which is under a Lévy process with a constant volatility. Using newly developed closed-form formulas of equity premium and pricing kernel, we are able to price Schouten's (2005) moment swaps analytically. Numerical results show that our pricing formula performs very well. Our model explains Zhao, Zhang and Chang's (2013) empirical observations on moment risk premiums.