Towards a general theory of bond markets (*)
AbstractThe main purpose of the paper is to provide a mathematical background for the theory of bond markets similar to that available for stock markets. We suggest two constructions of stochastic integrals with respect to processes taking values in a space of continuous functions. Such integrals are used to define the evolution of the value of a portfolio of bonds corresponding to a trading strategy which is a measure-valued predictable process. The existence of an equivalent martingale measure is discussed and HJM-type conditions are derived for a jump-diffusion model. The question of market completeness is considered as a problem of the range of a certain integral operator. We introduce a concept of approximate market completeness and show that a market is approximately complete iff an equivalent martingale measure is unique.
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Bibliographic InfoArticle provided by Springer in its journal Finance and Stochastics.
Volume (Year): 1 (1997)
Issue (Month): 2 ()
Note: received: March 1996; final version received: October 1996 To the memory of our friend and colleague Oliviero Lessi.
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Web page: http://www.springerlink.com/content/101164/
Other versions of this item:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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