A General Characterization of Quadratic Term Structure Models

Li Chen () and H. Vincent Poor
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H. Vincent Poor: Princeton University

Finance from University Library of Munich, Germany

Abstract: In this paper, we define a strongly regular quadratic Gaussian process to characterize quadratic term structure models (QTSMs) in a general Markov setting. The key of this definition is to keep the analytical tractability of QTSMs which has the quadratic term structure of the yield curve. In order to keep this property, under the regularity condition, we have proven that no jumps are allowed in the infinitesimal generator of the underlying state process. The coefficient functions defined in the quadratic Gaussian relationship can be decided by the multi-variate Riccati Equations with a unique admissible parameter set. Based on this result, we discuss the pricing problems of QTSMs under default-free and defaultable rates.

Keywords: Quadratic Term Structure models; Markov Semigroup theory; Affine process (search for similar items in EconPapers)
JEL-codes: C39 G12 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2002-11-28
New Economics Papers: this item is included in nep-cfn and nep-rmg
Note: Type of Document - Tex; prepared on IBM PC - PC-TEX; to print on PostScript; pages: 40 . We never published this piece and now we would like to reduce our mailing and xerox cost by posting it.
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Citations: View citations in EconPapers (3)

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