THE AFFINE RATIONAL POTENTIAL MODEL

The Anh Nguyen and Frank Thomas Seifried ()
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The Anh Nguyen: Nomura Financial Products Europe GmbH, Rathenauplatz 1, 60313 Frankfurt, Germany
Frank Thomas Seifried: Department IV — Mathematics, University of Trier, Universitätsring 19, 54296 Trier, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2021, vol. 24, issue 06n07, 1-25

Abstract: We develop a class of rational term structure models in the framework of the potential approach based upon a family of positive supermartingales that are driven by an affine Markov process. These models generally feature nonnegative interest rates and analytic pricing formulae for zero bonds, caps, swaptions, and European currency options, even in the presence of multiple factors. Moreover, in a model specification, the short rate stays near the zero lower bound for an extended period.

Keywords: Potential approach; Flesaker–Hughston models; affine processes; state price deflator; supermartingale; exchange rate; zero lower bound (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S021902492150031X

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