On the construction of finite dimensional realizations for nonlinear forward rate models

Camilla Landén () and Tomas Bjork
Additional contact information
Camilla Landén: Department of Mathematics, Royal Institute of Technology, SE-100 44 Stockholm, Sweden Manuscript

Finance and Stochastics, 2002, vol. 6, issue 3, 303-331

Abstract: We consider interest rate models of Heath-Jarrow-Morton type where the forward rates are driven by a multidimensional Wiener process, and where the volatility structure is allowed to be a smooth functional of the present forward rate curve. In a recent paper [3], Björk and Svensson give necessary and sufficient conditions for the existence of a finite dimensional Markovian state space realization (FDR) for such a forward rate model, and in the present paper we provide a general method for the actual construction of an FDR. We illustrate the method by constructing FDR:s for a number of concrete models. These FDR:s generalize previous results by allowing for a more general volatility structure. Furthermore the dimension of the realizations obtained by using our method is typically smaller than that of the corresponding previously known realizations.

Keywords: HJM models; factor models; forward rates; state space models; Markovian realizations (search for similar items in EconPapers)
JEL-codes: E43 G13 (search for similar items in EconPapers)
Date: 2002-05-17
Note: received: January 2001; final version received: August 2001
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
http://link.springer.de/link/service/journals/00780/papers/2006003/20060303.pdf (application/pdf)
Access to the full text of the articles in this series is restricted

Related works:
Working Paper: On the construction of finite dimensional realizations for nonlinear forward rate models (2000)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:finsto:v:6:y:2002:i:3:p:303-331

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().