Affine Realizations for Levy Driven Interest Rate Models with Real-World Forward Rate Dynamics

Eckhard Platen () and Stefan Tappe

No 289, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: We investigate the existence of affine realizations for interest rate term structure models driven by Levy processes. Using as numeraire the growth optimal portfolio, we model the interest rate term structure under the real-world probability measure, and hence, we do not need the existence of an equivalent risk-neutral probability measure. Furthermore, we include finite dimensional external factors, thus admitting a stochastic volatility structure.

Keywords: Levy driven interest rate models; real-world forward rate dynamics; stochastic volatility; affine realizations (search for similar items in EconPapers)
Pages: 19 pages
Date: 2011-03-01
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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:289

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