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Cylindrical stochastic integration and applications to financial term structure modeling

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  • Johannes Assefa
  • Philipp Harms

Abstract

We develop a novel - cylindrical - solution concept for stochastic evolution equations. Our motivation is to establish a Heath-Jarrow-Morton framework capable of analysing financial term structures with discontinuities, overcoming deep stochastic-analytic limitations posed by mild or weak solution concepts. Our cylindrical approach, which we investigate in full generality, bypasses these difficulties and nicely mirrors the structure of a large financial market.

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  • Johannes Assefa & Philipp Harms, 2022. "Cylindrical stochastic integration and applications to financial term structure modeling," Papers 2208.03939, arXiv.org, revised May 2023.
    • Handle: RePEc:arx:papers:2208.03939
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    References listed on IDEAS

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    1. Claudio Fontana & Zorana Grbac & Sandrine Gümbel & Thorsten Schmidt, 2020. "Term structure modelling for multiple curves with stochastic discontinuities," Finance and Stochastics, Springer, vol. 24(2), pages 465-511, April.
    2. Tappe, Stefan, 2010. "A note on stochastic integrals as L2-curves," Statistics & Probability Letters, Elsevier, vol. 80(13-14), pages 1141-1145, July.
    3. Fred Espen Benth & Jūratė Šaltytė Benth & Steen Koekebakker, 2008. "Stochastic Modeling of Electricity and Related Markets," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6811, January.
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