Pricing under the Real-World Probability Measure for Jump-Diffusion Term Structure Models
Christina Nikitopoulos-Sklibosios () and
Eckhard Platen ()
No 198, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney
This paper considers interest rate term structure models in a market attracting both continuous and discrete types of uncertainty. The event driven noise is modelled by a Poisson random measure. Using as numeraire the growth optimal portfolio, interest rate derivatives are priced under the real-world probability measure. In particular, the real-world dynamics of the forward rates are derived and, for specific volatility structures, finite dimensional Markovian representations are obtained. Furthermore, allowing for a stochastic short rate, a class of tractable affine term structures is derived where an equivalent risk-neutral probability measure does not exist.
Keywords: jump diffusions; affine term structure; real-world pricing; growth optimal portfolio; benchmark approach; HJM (search for similar items in EconPapers)
JEL-codes: G10 G13 (search for similar items in EconPapers)
Pages: 29 pages
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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:198
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