Consistency Problems for Jump‐diffusion Models

DOI10.1080/1350486042000297234MaRDI QIDQ5312580zbMATH OpenOpenAlexFDO

Authors Erhan Bayraktar, Li Chen, H. Vincent Poor

Publication date 1 September 2005

Published in Applied Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/cs/0501055

Mathematics Subject Classification ID

Abstract: In this paper consistency problems for multi-factor jump-diffusion models, where the jump parts follow multivariate point processes are examined. First the gap between jump-diffusion models and generalized Heath-Jarrow-Morton (HJM) models is bridged. By applying the drift condition for a generalized arbitrage-free HJM model, the consistency condition for jump-diffusion models is derived. Then we consider a case in which the forward rate curve has a separable structure, and obtain a specific version of the general consistency condition. In particular, a necessary and sufficient condition for a jump-diffusion model to be affine is provided. Finally the Nelson-Siegel type of forward curve structures is discussed. It is demonstrated that under regularity condition, there exists no jump-diffusion model consistent with the Nelson-Siegel curves.

Recommendations

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Cites work

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• Consistency problems for Heath-Jarrow-Morton interest rate models
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Cited in

(4)

• Fractional term structure models: No-arbitrage and consistency
• PROJECTING THE FORWARD RATE FLOW ONTO A FINITE DIMENSIONAL MANIFOLD
• Exponential-polynomial families and the term structure of interest rates
• Consistency conditions for affine term structure models II. Option pricing under diffusions with embdded jumps

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