Physics – Condensed Matter – Other Condensed Matter
Scientific paper
2004-04-05
"Stochastic Processes and their Applications", 109, 2004, pp. 225-261
Physics
Condensed Matter
Other Condensed Matter
39 pages
Scientific paper
ATSM are widely applied for pricing of bonds and interest rate derivatives but the consistency of ATSM when the short rate, r, is unbounded from below remains essentially an open question. First, the standard approach to ATSM uses the Feynman-Kac theorem which is easily applicable only when r is bounded from below. Second, if the tuple of state variables belongs to the region where r is positive, the bond price should decrease in any state variable for which the corresponding coefficient in the formula for r is positive; the bond price should also decrease as the time to maturity increases. In the paper, sufficient conditions for the application of the Feynman-Kac formula, and monotonicity of the bond price are derived, for wide classes of affine term structure models in the pure diffusion case. Necessary conditions for the monotonicity are obtained as well. The results can be generalized for jump-diffusion processes.
No associations
LandOfFree
Consistency conditions for affine term structure models does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.
If you have personal experience with Consistency conditions for affine term structure models, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Consistency conditions for affine term structure models will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-666591