A General Characterization of Quadratic Term Structure Models
AbstractIn 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.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0211008.
Length: 40 pages
Date of creation: 28 Nov 2002
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Quadratic Term Structure models; Markov Semigroup theory; Affine process;
Find related papers by 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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- NEP-ALL-2002-12-02 (All new papers)
- NEP-CFN-2002-12-02 (Corporate Finance)
- NEP-RMG-2002-12-02 (Risk Management)
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- Peng Cheng & Olivier Scaillet, 2002.
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- Sergei Levendorskii, 2002. "Pseudo-diffusions and Quadratic term structure models," Papers cond-mat/0212249, arXiv.org, revised Apr 2004.
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