RT Journal Article
SR Electronic
T1 Financial Interpretation of Feller’s Factorization
JF The Journal of Derivatives
FD Institutional Investor Journals
SP 49
OP 63
DO 10.3905/jod.2022.30.2.049
VO 30
IS 2
A1 Peter Carr
A1 Claudio Tebaldi
YR 2022
UL https://pm-research.com/content/30/2/49.abstract
AB The infinitesimal generator of a time-homogeneous univariate diffusion process is a second-order linear ordinary differential operator. Feller (1952) famously factorized this generator into successive differentiations with respect to scale and speed measure. Later, Feller (1957) also factored an extended generator that loads also on the identity operator in a particular way. We provide a novel financial interpretation of these factorization results and show that they produce an operator representation of a conditionally linear risk-return tradeoff when the conditioning variable evolves like a one-dimensional diffusion process.