Stochastic Jacobian and Riccati ODE in affine term structure models

DOI10.1007/S10203-007-0071-YMaRDI QIDQ2477604zbMATH OpenOpenAlexFDO

Authors Martino Grasselli, C. Tebaldi

Publication date 14 March 2008

Published in Decisions in Economics and Finance (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s10203-007-0071-y

zbMATH Keywords

affine processRiccati ordinary differential equationstochastic Jacobian

Mathematics Subject Classification ID

Applications of stochastic analysis (to PDEs, etc.) (60H30) Applications of statistics to economics (62P20)

Review text

Affine term structure models (ATSM) with heteroskedastic volatility appear to be at the boundary between traditional linear models and non-linear complex dynamical systems which are considered more realistic for economic modeling of financial markets. These economic motivations find a natural formulation within the framework and the results by \textit{R. J. Elliott} and \textit{J. van der Hoek} [Finance Stoch. 5, No.~4, 511--525 (2001; Zbl 0987.60067)] who show that it is possible to provide a direct relationship between the geometry of the stochastic flows and their Jacobians and the determination of the (deterministic) factor sensitivities, a natural bridge between empirical testing of bond yields and theoretical modeling of macrofactors driving the economy. The proposed approach leads to a deterministic integro-differential equation and does not involve the solution to Riccati equations obtained by the standard Feynman-Kac argument. The authors of this paper find a procedure that reduces such integro-differential equation to a non linear matrix ordinary differential equations. They prove that its solution does necessarily require the solution of the vector Riccati ordinary differential equations. They also provide the link between the stochastic Jacobian approach and the Riccati equations and illustrate the relation between the stochastic Jacobian flow and the linearization procedure for the Riccati ordinary differential equation in the one-dimensional case.

Recommendations

• A forward-backward SDE approach to affine models
• SOLVABLE AFFINE TERM STRUCTURE MODELS
• Stochastic Jacobians in affine term-structure models: a local property
• Re-specification of Affine Term Structure Models: The Linkage to Empirical Investigations
• Discrete time Wishart term structure models
• Bond pricing under a Markovian regime-switching jump-augmented vasicek model via stochastic flows
• Stochastic flows and the forward measure
• Affine variance swap curve models
• On the Heston model with stochastic correlation

Cites work

• A survey of nonsymmetric Riccati equations
• A theory of the term structure of interest rates
• A YIELD‐FACTOR MODEL OF INTEREST RATES
• Affine processes and applications in finance
• scientific article; zbMATH DE number 777596 (Why is no real title available?)
• Interest rate volatility and the shape of the term structure
• SOLVABLE AFFINE TERM STRUCTURE MODELS
• Stochastic flows and the forward measure
• Transform Analysis and Asset Pricing for Affine Jump-diffusions

Cited in

(5)

• A forward-backward SDE approach to affine models
• Stochastic Jacobians in affine term-structure models: a local property
• SOLVABLE AFFINE TERM STRUCTURE MODELS
• Explicit solutions of quadratic FBSDEs arising from quadratic term structure models
• Maximum principles for boundary-degenerate second order linear elliptic differential operators

This page was built for publication: Stochastic Jacobian and Riccati ODE in affine term structure models

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2477604)