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Stochastic flows and the forward measure

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Author Info

  • Robert J. Elliott

    ()
    (Department of Mathematical Sciences, University of Alberta, Edmonton, Alberta, Canada T6G 2G1)

  • John van der Hoek

    ()
    (Department of Applied Mathematics, University of Adelaide, Adelaide, South Australia 5005 Mauscript)

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    Abstract

    Stochastic flows and their Jacobians are used to show why, when the short rate process is described by Gaussian dynamics, (as in the Vasicek or Hull-White models), or square root, affine (Bessel) processes, (as in the Cox-Ingersoll-Ross, or Duffie-Kan models), the bond price is an exponential affine function. Using the forward measure the bond price is obtained by solving a linear ordinary differential equation; Ricatti equations are not required.

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    Bibliographic Info

    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 5 (2001)
    Issue (Month): 4 ()
    Pages: 511-525

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    Handle: RePEc:spr:finsto:v:5:y:2001:i:4:p:511-525

    Note: received: February 1999; final version received: October 2000
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    Web page: http://www.springerlink.com/content/101164/

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    Related research

    Keywords: Forward measure; exponential affine; bond pricing;

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    Cited by:
    1. Hyndman, Cody Blaine, 2007. "Forward-backward SDEs and the CIR model," Statistics & Probability Letters, Elsevier, vol. 77(17), pages 1676-1682, November.
    2. Shen, Yang & Siu, Tak Kuen, 2012. "Asset allocation under stochastic interest rate with regime switching," Economic Modelling, Elsevier, vol. 29(4), pages 1126-1136.

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