| By: |
Nicola Bruti-Liberati (School of Finance and Economics, University of Technology, Sydney);
Christina Nikitopoulos-Sklibosios (School of Finance and Economics, University of Technology, Sydney);
Eckhard Platen (School of Finance and Economics, University of Technology, Sydney) |
| Abstract: |
This paper considers interest rate term structure models in a market
attracting both continuous and discrete types of uncertainty. The event driven
noise is modelled by a Poisson random measure. Using as numeraire the growth
optimal portfolio, interest rate derivatives are priced under the real-world
probability measure. In particular, the real-world dynamics of the forward
rates are derived and, for specific volatility structures, finite dimensional
Markovian representations are obtained. Furthermore, allowing for a stochastic
short rate, a class of tractable affine term structures is derived where an
equivalent risk-neutral probability measure does not exist. |
| Keywords: |
jump diffusions; affine term structure; real-world pricing; growth optimal portfolio; benchmark approach; HJM |
| JEL: |
G10 G13 |
| Date: |
2007–06–01 |
| URL: |
http://d.repec.org/n?u=RePEc:uts:rpaper:197&r=fmk |