Discrete time term structure theory and consistent recalibration models

DOI10.1137/15M1007434MaRDI QIDQ4607042zbMATH OpenOpenAlexFDO

Authors Anja Richter, Josef Teichmann

Publication date 12 March 2018

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1409.1830

zbMATH Keywords

calibrationvolatility surfaceaffine processfinite dimensional realizationforward characteristic process

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Abstract: We develop theory and applications of forward characteristic processes in discrete time following a seminal paper of Jan Kallsen and Paul Kr"uhner. Particular emphasis is placed on the dynamics of volatility surfaces which can be easily formulated and implemented from the chosen discrete point of view. In mathematical terms we provide an algorithmic answer to the following question: describe a rich, still tractable class of discrete time stochastic processes, whose marginal distributions are given at initial time and which are free of arbitrage. In terms of mathematical finance we can construct models with pre-described (implied) volatility surface and quite general volatility surface dynamics. In terms of the works of Rene Carmona and Sergey Nadtochiy, we analyze the dynamics of tangent affine models. We believe that the discrete approach due to its technical simplicity will be important in term structure modelling.

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Cites work

• A market model for stochastic implied volatility
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Cited in

(10)

• Estimation and empirical evaluation of the time-dependent Extended CIR term structure model
• Noncausal affine processes with applications to derivative pricing
• Simulation of implied volatility surfaces via tangent Lévy models
• Discrete time Wishart term structure models
• A noisy principal component analysis for forward rate curves
• Term structure modelling for multiple curves with stochastic discontinuities
• Long memory affine term structure models
• Affine processes beyond stochastic continuity
• scientific article; zbMATH DE number 5588947 (Why is no real title available?)
• Mean Reversion Level Extensions of Time‐Homogeneous Affine Term Structure Models

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