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A General Characterization of Quadratic Term Structure Models

Author

Listed:
  • Li Chen

    (Princeton University)

  • H. Vincent Poor

    (Princeton University)

Abstract

In this paper, we define a strongly regular quadratic Gaussian process to characterize quadratic term structure models (QTSMs) in a general Markov setting. The key of this definition is to keep the analytical tractability of QTSMs which has the quadratic term structure of the yield curve. In order to keep this property, under the regularity condition, we have proven that no jumps are allowed in the infinitesimal generator of the underlying state process. The coefficient functions defined in the quadratic Gaussian relationship can be decided by the multi-variate Riccati Equations with a unique admissible parameter set. Based on this result, we discuss the pricing problems of QTSMs under default-free and defaultable rates.

Suggested Citation

  • Li Chen & H. Vincent Poor, 2002. "A General Characterization of Quadratic Term Structure Models," Finance 0211008, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0211008
    Note: Type of Document - Tex; prepared on IBM PC - PC-TEX; to print on PostScript; pages: 40 . We never published this piece and now we would like to reduce our mailing and xerox cost by posting it.
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    References listed on IDEAS

    as
    1. Dilip Madan & Haluk Unal, 1996. "Pricing the Risks of Default," Center for Financial Institutions Working Papers 94-16, Wharton School Center for Financial Institutions, University of Pennsylvania.
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    Cited by:

    1. Peng Cheng & Olivier Scaillet, 2002. "Linear-Quadratic Jump-Diffusion Modeling with Application to Stochastic Volatility," FAME Research Paper Series rp67, International Center for Financial Asset Management and Engineering.
    2. Sergei Levendorskii, 2002. "Pseudo-diffusions and Quadratic term structure models," Papers cond-mat/0212249, arXiv.org, revised Apr 2004.

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    More about this item

    Keywords

    Quadratic Term Structure models; Markov Semigroup theory; Affine process;
    All these keywords.

    JEL classification:

    • C39 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Other
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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