A pure-jump mean-reverting short rate model

Markus Hess

Papers from arXiv.org

Abstract: A new multi-factor short rate model is presented which is bounded from below by a real-valued function of time. The mean-reverting short rate process is modeled by a sum of pure-jump Ornstein--Uhlenbeck processes such that the related bond prices possess affine representations. Also the dynamics of the associated instantaneous forward rate is provided and a condition is derived under which the model can be market-consistently calibrated. The analytical tractability of this model is illustrated by the derivation of an explicit plain vanilla option price formula. With view on practical applications, suitable probability distributions are proposed for the driving jump processes. The paper is concluded by presenting a post-crisis extension of the proposed short and forward rate model.

Date: 2020-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Modern Stochastics: Theory and Applications 2020, Vol. 7, No. 2, 113-134

Downloads: (external link)
http://arxiv.org/pdf/2006.14814 Latest version (application/pdf)

Related works:
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:arx:papers:2006.14814

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().