Stochastic flows and the forward measure

Robert J. Elliott () and John van der Hoek ()
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Robert J. Elliott: Department of Mathematical Sciences, University of Alberta, Edmonton, Alberta, Canada T6G 2G1
John van der Hoek: Department of Applied Mathematics, University of Adelaide, Adelaide, South Australia 5005 Mauscript

Finance and Stochastics, 2001, vol. 5, issue 4, 525 pages

Abstract: Stochastic flows and their Jacobians are used to show why, when the short rate process is described by Gaussian dynamics, (as in the Vasicek or Hull-White models), or square root, affine (Bessel) processes, (as in the Cox-Ingersoll-Ross, or Duffie-Kan models), the bond price is an exponential affine function. Using the forward measure the bond price is obtained by solving a linear ordinary differential equation; Ricatti equations are not required.

Keywords: Forward measure; exponential affine; bond pricing (search for similar items in EconPapers)
JEL-codes: C63 G13 (search for similar items in EconPapers)
Date: 2001-10-04
Note: received: February 1999; final version received: October 2000
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Citations: View citations in EconPapers (8)

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