Real-World Forward Rate Dynamics With Affine Realizations

DOI10.1080/07362994.2015.1019629zbMATH Open1335.91094arXiv1907.05072OpenAlexW2962962067MaRDI QIDQ3448331FDOQ3448331

Eckhard Platen, Stefan Tappe

Publication date: 23 October 2015

Published in: Stochastic Analysis and Applications (Search for Journal in Brave)

Abstract: We investigate the existence of affine realizations for L'{e}vy driven interest rate term structure models under the real-world probability measure, which so far has only been studied under an assumed risk-neutral probability measure. For models driven by Wiener processes, all results obtained under the risk-neutral approach concerning the existence of affine realizations are transferred to the general case. A similar result holds true for models driven by compound Poisson processes with finite jump size distributions. However, in the presence of jumps with infinite activity we obtain severe restrictions on the structure of the market price of risk; typically, it must even be constant.

Full work available at URL: https://arxiv.org/abs/1907.05072

zbMATH Keywords

market price of riskaffine realizationLévy driven interest rate modelreal-world forward rate dynamics

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Stochastic partial differential equations (aspects of stochastic analysis) (60H15) Interest rates, asset pricing, etc. (stochastic models) (91G30)

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Cited In (2)

• Affine realizations with affine state processes for stochastic partial differential equations
• Invariance of closed convex cones for stochastic partial differential equations

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