On the construction of finite dimensional realizations for nonlinear forward rate models
2002 (English)In: Finance and Stochastics, ISSN 0949-2984, E-ISSN 1432-1122, Vol. 6, no 3, 303-331 p.Article in journal (Refereed) Published
We consider interest rate models of Heath-Jarrow-Morton type where the forward rates are driven by a multidimensional Wiener process, and where the volatility structure is allowed to be a smooth functional of the present forward rate curve. In a recent paper , Björk and Svensson give necessary and sufficient conditions for the existence of a finite dimensional Markovian state space realization (FDR) for such a forward rate model, and in the present paper we provide a general method for the actual construction of an FDR. We illustrate the method by constructing FDR:s for a number of concrete models. These FDR:s generalize previous results by allowing for a more general volatility structure. Furthermore the dimension of the realizations obtained by using our method is typically smaller than that of the corresponding previously known realizations.
Place, publisher, year, edition, pages
2002. Vol. 6, no 3, 303-331 p.
HJM models, factor models, forward rates, state space models, Markovian realizations
IdentifiersURN: urn:nbn:se:kth:diva-12543DOI: 10.1007/s007800100060OAI: oai:DiVA.org:kth-12543DiVA: diva2:317793
QC 201005052010-05-052010-05-052012-02-14Bibliographically approved