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

affine processcalibrationfinite dimensional realizationforward characteristic processvolatility surface

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.

Recommendations

• Markovian term structure models in discrete time
• Consistent recalibration of yield curve models
• Continuous-time term structure models: Forward measure approach
• TANGENT MODELS AS A MATHEMATICAL FRAMEWORK FOR DYNAMIC CALIBRATION
• Arbitrage-free discretization of lognormal forward Libor and swap rate models

Cites work

• A market model for stochastic implied volatility
• Affine processes and applications in finance
• Arbitrage-free market models for option prices: the multi-strike case
• Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation
• Fourier transform methods for pathwise covariance estimation in the presence of jumps
• Local volatility dynamic models
• On a Heath-Jarrow-Morton approach for stock options
• On the geometry of the term structure of interest rates
• Regularity of affine processes on general state spaces
• Stochastic finance. An introduction in discrete time
• Tangent Lévy market models
• TERM STRUCTURES OF IMPLIED VOLATILITIES: ABSENCE OF ARBITRAGE AND EXISTENCE RESULTS
• Time-inhomogeneous affine processes

Cited in

(10)

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

This page was built for publication: Discrete time term structure theory and consistent recalibration models

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q4607042)