Towards a General Theory of Bond Markets

Tomas Bjork, Giovanni di Masi, Yuri Kabanov and Wolfgang Runggaldier
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Giovanni di Masi: Dipartimento di Matematica Pura et Applicata, Postal: Universitá di Padova, Via belzoni 7, 351 31 Padova, Italy
Yuri Kabanov: Laboratoire de Mathématiques, Postal: Université de Franche-Comté, 16 Route de Gray, F-25030 Besançon Cedex France
Wolfgang Runggaldier: Dipartimento di Matematica Pura et Applicata, Postal: Universitá di Padova, Via Belzoni 7, 351 31 Padova, Italy
Authors registered in the RePEc Author Service: Юрий Михайлович Кабанов

No 143, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: The main purpose of the paper is to provide a mathematical background for the theory of bond markets similar to that available for stock markets. We suggest two constructions of stochastic integrals with respect to processes taking values in a space of continuous functions. Such integrals are used to define the evolution of the value of a portfolio of bonds corresponding to a trading strategy which is a measure- valued predictable process. The existence of an equivalent martingale measure is discussed and HJM-type conditions are derived for a jump-diffusion model. The question of market completeness is considered as a problem of the range of a certain integral operator. We introduce a concept of approximate market completeness and show that a market is approximately complete if an equivalent martingale measure is unique.

Keywords: Bond market; term structure of interest rates; stochastic integral; Banach space-valued integrators; measure-valued portfolio; jump-diffusion model; martingale measure; arbitrage; market completeness (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Pages: 33 pages
Date: 1996-12
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Citations: View citations in EconPapers (4)

Published in Finance and Stochastics, 1997, pages 141-174.

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Related works:
Journal Article: Towards a general theory of bond markets (*) (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:hastef:0143

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