A heat kernel approach to interest rate models

DOI10.1007/S13160-014-0147-3MaRDI QIDQ403855zbMATH OpenOpenAlexFDO

Authors Jirô Akahori, Yuji Hishida, Josef Teichmann, Takahiro Tsuchiya

Publication date 29 August 2014

Published in Japan Journal of Industrial and Applied Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0910.5033

zbMATH Keywords

state price densityMarkov-functional

Mathematics Subject Classification ID

PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Continuous-time Markov processes on general state spaces (60J25) Heat kernel (35K08) PDEs with randomness, stochastic partial differential equations (35R60)

Abstract: We construct default-free interest rate models in the spirit of the well-known Markov funcional models: our focus is analytic tractability of the models and generality of the approach. We work in the setting of state price densities and construct models by means of the so called propagation property. The propagation property can be found implicitly in all of the popular state price density approaches, in particular heat kernels share the propagation property (wherefrom we deduced the name of the approach). As a related matter, an interesting property of heat kernels is presented, too.

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Cites work

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Cited in

(6)

• The affine rational potential model
• Rational multi-curve models with counterparty-risk valuation adjustments
• Heat kernel models for asset pricing
• Generalizations of Ho-Lee's binomial interest rate model II: randomization
• Polynomial term structure models
• Randomised mixture models for pricing kernels

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