A Feynman-Kac type formula for a fixed delay CIR model

DOI10.1080/07362994.2019.1592691MaRDI QIDQ5378408zbMATHOpenAlexWikidataFDO

Authors Federico Flore, Giovanna Nappo

Publication date 12 June 2019

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

Full work available at URL https://arxiv.org/abs/1806.00997

zbMATH Keywords

equivalent martingale measurestochastic delay differential equationsinterest rate modelgeneralized Bessel-square processes

Mathematics Subject Classification ID

Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Stochastic functional-differential equations (34K50) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Abstract: Stochastic delay differential equations (SDDE's) have been used for financial modeling. In this article, we study a SDDE obtained by the equation of a CIR process, with an additional fixed delay term in drift; in particular, we prove that there exists a unique strong solution (positive and integrable) which we call fixed delay CIR process. Moreover, for the fixed delay CIR process, we derive a Feynman-Kac type formula, leading to a generalized exponential-affine formula, which is used to determine a bond pricing formula when the interest rate follows the delay's equation. It turns out that, for each maturity time T, the instantaneous forward rate is an affine function (with time dependent coefficients) of the rate process and of an auxiliary process (also depending on T). The coefficients satisfy a system of deterministic delay differential equations.

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Cited in

(4)

• Strong convergence rate of implicit Euler scheme to a CIR model with delay
• Delay Kaldor–Kalecki Model Revisited
• Cucker-Smale model with time delay
• Kramers-Moyal expansion for stochastic differential equations with single and multiple delays: applications to financial physics and neurophysics

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