Real-World Forward Rate Dynamics With Affine Realizations

Eckhard Platen () and Steffan Tappe

Published Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: We investigate the existence of affine realizations for Lévy driven interest rate term structure models under the real-world probability measure, which so far has only been studied under an assumed risk-neutral probability measure. For models driven by Wiener processes, all results obtained under the risk-neutral approach concerning the existence of affine realizations are transferred to the general case. A similar result holds true for models driven by compound Poisson processes with finite jump size distributions. However, in the presence of jumps with infinite activity we obtain severe restrictions on the structure of the market price of risk; typically, it must even be constant.

Keywords: Lévy driven interest rate model; Real-world forward rate dynamics; Affine realization; Market price of risk (search for similar items in EconPapers)
Pages: 26 pages
Date: 2015-01-01
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Citations: View citations in EconPapers (7)

Published as: Platen, E. and Tappe, S., 2015, "Real-World Forward Rate Dynamics With Affine Realizations", Stochastic Analysis and Applications, 33(4), 573-608

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Working Paper: Real-world forward rate dynamics with affine realizations (2019)
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