Affine representations of fractional processes with applications in mathematical finance

DOI10.1016/J.SPA.2018.04.010MaRDI QIDQ2419969zbMATH OpenOpenAlexFDO

Authors Philipp Harms, David Stefanovits

Publication date 4 June 2019

Published in Stochastic Processes and their Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1510.04061

zbMATH Keywords

affine processfractional interest rate modelfractional processfractional volatility modelinfinite-dimensional Markov processMarkovian representation

Mathematics Subject Classification ID

Gaussian processes (60G15) Fractional processes, including fractional Brownian motion (60G22) Continuous-time Markov processes on general state spaces (60J25) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Abstract: Fractional processes have gained popularity in financial modeling due to the dependence structure of their increments and the roughness of their sample paths. The non-Markovianity of these processes gives, however, rise to conceptual and practical difficulties in computation and calibration. To address these issues, we show that a certain class of fractional processes can be represented as linear functionals of an infinite dimensional affine process. This can be derived from integral representations similar to those of Carmona, Coutin, Montseny, and Muravlev. We demonstrate by means of several examples that this allows one to construct tractable financial models with fractional features.

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Cited in

(25)

• Affine processes and applications in finance
• Fractional Wishart processes and \(\varepsilon\)-fractional Wishart processes with applications
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