The squared-Ornstein-Uhlenbeck market
Professor Chris Rogers, University of Cambridge
(Joint work with John Aquilina)

Abstract:
Why does a share have value? How is that value determined? These are basic questions which get assumed away in the Black-Scholes world, but to which economists have perfectly satisfactory answers, in terms of a general equilibrium of a dynamic market. General equilibrium is both easy (to explain and understand) and difficult (to illustrate with explicit examples). This talk (which is mainly pedagogical in aim) analyses a simple example where many of the things we are interested in (such as the equilibrium prices of bonds, shares, and more general financial instruments) can be solved in closed form (in terms of generalised hypergeometric functions). Some rudimentary fitting to yield curve data suggests that the resulting models could be of practical value.