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On arbitrage and Markovian short rates in fractional bond markets

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  • Gapeev, Pavel V.

Abstract

We study a bond market model and related term structure of interest rates driven by a fractional Brownian motion with self-similarity parameter H[set membership, variant](1/2,1). We present a criterion on the deterministic forward rate volatility under which the short rate process is Markovian and construct an admissible self-financing portfolio realizing an arbitrage opportunity.

Suggested Citation

  • Gapeev, Pavel V., 2004. "On arbitrage and Markovian short rates in fractional bond markets," Statistics & Probability Letters, Elsevier, vol. 70(3), pages 211-222, December.
    • Handle: RePEc:eee:stapro:v:70:y:2004:i:3:p:211-222
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    References listed on IDEAS

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