Arbitrage-free valuation of interest rate securities under forward curves with stochastic speed and acceleration

• 成果类型: Article
• 署名作者: Pandher, Gurupdesh
• 署名单位: DePaul University
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2006.12.003
• 发表日期: 2007
• 页码: 432-459
• 关键词: HIM; forward rates; arbitrage-free restriction; volatility estimation

摘要

Arbitrage-free models for valuing interest rate securities posit that stochastic changes in spot or forward interest rates (forward rate speed) follow a diffusion process. This paper extends the Heath, Jarrow and Morton (Bond pricing and the term structure of interest rates: a new methodology for contingent claims valuations, Econometrica 60 (1992) 77-105], HJM framework by allowing diffusive shocks to both the speed and acceleration of forward rates. The arbitrage-free restriction on forward rates is identified and involves volatilities of the speed and acceleration dynamics and their correlation. Although the extended forward rates remain in the diffusive framework and evolve continuously, they may exhibit large changes over short intervals (as with jumps) due to stochastic acceleration. Comparisons of bond prices show that the proposed model generates more complex and intricate shapes for the restricted forward curve with the same number of stochastic factors and volatility. (c) 2007 Elsevier Inc. All rights reserved.