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Affine Realizations for Levy Driven Interest Rate Models with Real-World Forward Rate Dynamics

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Abstract

We investigate the existence of affine realizations for interest rate term structure models driven by Levy processes. Using as numeraire the growth optimal portfolio, we model the interest rate term structure under the real-world probability measure, and hence, we do not need the existence of an equivalent risk-neutral probability measure. Furthermore, we include finite dimensional external factors, thus admitting a stochastic volatility structure.

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File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp289.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 289.

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Length: 19
Date of creation: 01 Mar 2011
Date of revision:
Handle: RePEc:uts:rpaper:289

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Keywords: Levy driven interest rate models; real-world forward rate dynamics; stochastic volatility; affine realizations;

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  1. Nicola Bruti-Liberati & Christina Nikitopoulos-Sklibosios & Eckhard Platen, 2010. "Real-world jump-diffusion term structure models," Quantitative Finance, Taylor & Francis Journals, vol. 10(1), pages 23-37.
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