Bonds with volatilities proportional to forward rates

Michal Baran and Jerzy Zabczyk

Papers from arXiv.org

Abstract: The problem of existence of solution for the Heath-Jarrow-Morton equation with linear volatility and purely jump random factor is studied. Sufficient conditions for existence and non-existence of the solution in the class of bounded fields are formulated. It is shown that if the first derivative of the Levy-Khinchin exponent grows slower then logarithmic function then the answer is positive and if it is bounded from below by a fractional power function of any positive order then the answer is negative. Numerous examples including models with Levy measures of stable type are presented.

Date: 2009-11
New Economics Papers: this item is included in nep-mac
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