Finite dimensional Markovian realizations for stochastic volatility forward rate models

Tomas Bjork, Camilla Landén and Lars Svensson ()
Additional contact information
Camilla Landén: Länsförsäkringar Liv, Postal: Länsförsäkringar Liv, SE-173 81 Stockholm, Sweden
Lars Svensson: Department of Mathematics, Royal Institute of Technology, Postal: Department of Mathematics, KTH, SE-100 44 Stockholm, Sweden

No 498, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: We consider forward rate rate models of HJM type, as well as more general infinite dimensional SDEs, where the volatility/diffusion term is stochastic in the sense of being driven by a separate hidden Markov process.

Within this framework we use the previously developed Hilbert space realization theory in order provide general necessary and sufficent conditions for the existence of a finite dimensional Markovian realizations for the stochastic volatility models. We illustrate the theory by analyzing a number of concrete examples.

Keywords: HJM models; stochastic volatility; factor models; forward rates; state space models; Markovian realizations; infinite dimensional SDEs (search for similar items in EconPapers)
JEL-codes: E43 G13 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2002-04-29, Revised 2002-05-07
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:hastef:0498

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