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Modeling of short term interest rate based on tempered fractional Langevin equation

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  • Janusz Gajda

Abstract

We develop a new class of continuous-time models based on the solutions of tempered fractional Langevin equations for Ornstein–Uhlenbeck process driven by Levy noise. We present methods of simulation of sample paths of such processes. We show how to use such models in modeling short term interest rate. We develop tempered Vasicek interest rate model by finding explicit solutions of tempered fractional Langevin equations.

Suggested Citation

  • Janusz Gajda, 2012. "Modeling of short term interest rate based on tempered fractional Langevin equation," HSC Research Reports HSC/12/03, Hugo Steinhaus Center, Wroclaw University of Technology.
    • Handle: RePEc:wuu:wpaper:hsc1203
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    File URL: http://www.im.pwr.wroc.pl/~hugo/RePEc/wuu/wpaper/HSC_12_03.pdf
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    References listed on IDEAS

    as
    1. Szymon Borak & Adam Misiorek & Rafał Weron, 2010. "Models for Heavy-tailed Asset Returns," SFB 649 Discussion Papers SFB649DP2010-049, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. Oecd, 2006. "The SME Financing Gap: Theory and Evidence," Financial Market Trends, OECD Publishing, vol. 2006(2), pages 89-97.
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    More about this item

    Keywords

    Short term interest rate; Simulation; Langevin equation; Vasicek model;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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