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A pure-jump mean-reverting short rate model

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  • Markus Hess

Abstract

A new multi-factor short rate model is presented which is bounded from below by a real-valued function of time. The mean-reverting short rate process is modeled by a sum of pure-jump Ornstein--Uhlenbeck processes such that the related bond prices possess affine representations. Also the dynamics of the associated instantaneous forward rate is provided and a condition is derived under which the model can be market-consistently calibrated. The analytical tractability of this model is illustrated by the derivation of an explicit plain vanilla option price formula. With view on practical applications, suitable probability distributions are proposed for the driving jump processes. The paper is concluded by presenting a post-crisis extension of the proposed short and forward rate model.

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  • Markus Hess, 2020. "A pure-jump mean-reverting short rate model," Papers 2006.14814, arXiv.org.
    • Handle: RePEc:arx:papers:2006.14814
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    References listed on IDEAS

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    Cited by:

    1. Oleksandr Castello & Marina Resta, 2022. "Modeling the Yield Curve of BRICS Countries: Parametric vs. Machine Learning Techniques," Risks, MDPI, vol. 10(2), pages 1-18, February.

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