Asset Pricing with Matrix Jump Diffusions

We introduce a new class of flexible and tractable matrix a±ne jump-diffusions (AJD) to modelmultivariate sources of financial risk. We first provide a complete transform analysis of this model class,which opens a range of new potential applications to, e.g., multivariate option pricing with stochasticvolatilities and correlations, fixed-income models with stochastically correlated default intensities, ormultivariate dynamic portfolio choice with volatility and correlation jumps. We then study in moredetail some of the new structural features of our modeling approach in two applications to optionpricing and dynamic portfolio choice. First, we find that a three-factor matrix AJD model can generatevariations of the implied volatility skew term structures that are largely unrelated to the level andcomposition of the spot volatility.[...]