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What is the Natural Scale for a Lévy Process in Modelling Term Structure of Interest Rates?

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  • Jirô Akahori
  • Takahiro Tsuchiya

Abstract

This paper gives examples of explicit arbitrage-free term structure models with L\'evy jumps via state price density approach. By generalizing quadratic Gaussian models, it is found that the probability density function of a L\'evy process is a "natural" scale for the process to be the state variable of a market.
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Suggested Citation

  • Jirô Akahori & Takahiro Tsuchiya, 2006. "What is the Natural Scale for a Lévy Process in Modelling Term Structure of Interest Rates?," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 13(4), pages 299-313, December.
    • Handle: RePEc:kap:apfinm:v:13:y:2006:i:4:p:299-313
    DOI: 10.1007/s10690-007-9046-9
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    Cited by:

    1. Yuta Inoue & Takahiro Tsuchiya, 2011. "Defaultable Bonds via HKA," Papers 1103.4541, arXiv.org.
    2. Jiro Akahori & Yuji Hishida & Josef Teichmann & Takahiro Tsuchiya, 2009. "A Heat Kernel Approach to Interest Rate Models," Papers 0910.5033, arXiv.org.

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    More about this item

    Keywords

    State price density approach; Term structure models; Shirakawa model; Lévy process; Probability density; 91B70; 60G52; G12;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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