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A general characterization of one factor affine term structure models

Author

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  • Damir Filipovic

    (Department of Mathematics, ETH, CH-8092 Zurich, Switzerland Manusript)

Abstract

We give a complete characterization of affine term structure models based on a general nonnegative Markov short rate process. This applies to the classical CIR model but includes as well short rate processes with jumps. We provide a link to the theory of branching processes and show how CBI-processes naturally enter the field of term structure modelling. Using Markov semigroup theory we exploit the full structure behind an affine term structure model and provide a deeper understanding of some well-known properties of the CIR model. Based on these fundamental results we construct a new short rate model with jumps, which extends the CIR model and still gives closed form expressions for bond options.

Suggested Citation

  • Damir Filipovic, 2001. "A general characterization of one factor affine term structure models," Finance and Stochastics, Springer, vol. 5(3), pages 389-412.
    • Handle: RePEc:spr:finsto:v:5:y:2001:i:3:p:389-412
    Note: received: June 2000, final version received: October 2000
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    More about this item

    Keywords

    Affine Term Structure Models; CBI-Processes; Infinitely Decomposable Processes; Non-continuous Markovian Short Rates;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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