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

Eckhard Platen | Zendy; Stefan Tappe | Zendy

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

Author(s) -

Eckhard Platen,

Stefan Tappe

Publication year - 2011

Publication title -

ssrn electronic journal

Language(s) - English

Resource type - Journals

ISSN - 1556-5068

DOI - 10.2139/ssrn.2170196

Subject(s) - rendleman–bartter model , short rate model , numéraire , affine term structure model , forward rate , interest rate , affine transformation , short rate , measure (data warehouse) , stochastic volatility , econometrics , mathematics , yield curve , vasicek model , probability measure , portfolio , interest rate derivative , volatility (finance) , mathematical economics , economics , computer science , financial economics , statistics , monetary economics , database , pure mathematics

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.

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