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

Research Paper Number: 289, Quantitative Finance Research Centre, University of Technology, Sydney

19 Pages Posted: 4 Nov 2012

See all articles by Eckhard Platen

Eckhard Platen

University of Technology, Sydney (UTS) - Finance Discipline Group; University of Technology Sydney, School of Mathematical and Physical Sciences; Financial Research Network (FIRN)

Stefan Tappe

affiliation not provided to SSRN

Date Written: March 1, 2011

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

Suggested Citation

Platen, Eckhard and Tappe, Stefan, Affine Realizations for Levy Driven Interest Rate Models with Real-World Forward Rate Dynamics (March 1, 2011). Research Paper Number: 289, Quantitative Finance Research Centre, University of Technology, Sydney, Available at SSRN: https://ssrn.com/abstract=2170196 or http://dx.doi.org/10.2139/ssrn.2170196

Eckhard Platen (Contact Author)

University of Technology, Sydney (UTS) - Finance Discipline Group ( email )

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HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=90

University of Technology Sydney, School of Mathematical and Physical Sciences ( email )

P.O. Box 123
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Sydney, New South Wales 2007
Australia
+61 (02) 9514 2271 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Stefan Tappe

affiliation not provided to SSRN ( email )

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