Alpha-CIR model with branching processes in sovereign interest rate modeling (Q2364536)

In this paper, the authors propose a new short rate model based on the \(\alpha\)-CIR process, with a specific application to the modelling of interest rates on sovereign bonds. Indeed, such interest rates have recently shown a behavior which alternates periods of persistently low interest rates and periods of high volatility. The \(\alpha\)-CIR model allows to capture such a behavior and generalizes the classical CIR model by introducing a jump part driven by a compensated \(\alpha\)-stable Lévy process. The parameter \(\alpha\) determines the behavior of this jump part. Despite the greater generality, the model preserves most of the analytical tractability of the CIR model. In particular, it represents a CBI process, so that its Laplace transform can be computed in an explicit form, up to the solution of an ODE. This feature enables the analytical pricing of zero-coupon bonds. The authors also study the relation of this process to Hawkes processes and present a detailed analysis of the jump behavior.