Physics – Condensed Matter – Other Condensed Matter
Scientific paper
2004-08-12
Physics
Condensed Matter
Other Condensed Matter
Elsevier style file, 22 pages, one postscript figure, revised on 07/09/2004
Scientific paper
We consider a generalization of the Heath Jarrow Morton model for the term structure of interest rates where the forward rate is driven by Paretian fluctuations. We derive a generalization of It\^{o}'s lemma for the calculation of a differential of a Paretian stochastic variable and use it to derive a Stochastic Differential Equation for the discounted bond price. We show that it is not possible to choose the parameters of the model to ensure absence of drift of the discounted bond price. Then we consider a Continuous Time Random Walk with jumps driven by Paretian random variables and we derive the large time scaling limit of the jump probability distribution function (pdf). We show that under certain conditions defined in text the large time scaling limit of the jump pdf in the Fourier domain is \tilde{omega}_t(k,t) \sim \exp{-K/(\ln(k t))^2} and is different from the case of a random walk with Gaussian fluctuations. We also derive the master equation for the jump pdf and discuss the relation of the master equation to Distributed Order Fractional Diffusion Equations.
Lucey Brian
Repetowicz Przemyslaw
Richmond Peter
No associations
LandOfFree
Modelling the term structure of interest rates á la Heath-Jarrow-Morton but with non Gaussian fluctuations 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 Modelling the term structure of interest rates á la Heath-Jarrow-Morton but with non Gaussian fluctuations, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Modelling the term structure of interest rates á la Heath-Jarrow-Morton but with non Gaussian fluctuations will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-574839