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The Affine Rational Potential Model

Author

Listed:
  • THE ANH NGUYEN

    (Nomura Financial Products Europe GmbH, Rathenauplatz 1, 60313 Frankfurt, Germany)

  • FRANK THOMAS SEIFRIED

    (Department IV — Mathematics, University of Trier, Universitätsring 19, 54296 Trier, Germany)

Abstract

We develop a class of rational term structure models in the framework of the potential approach based upon a family of positive supermartingales that are driven by an affine Markov process. These models generally feature nonnegative interest rates and analytic pricing formulae for zero bonds, caps, swaptions, and European currency options, even in the presence of multiple factors. Moreover, in a model specification, the short rate stays near the zero lower bound for an extended period.

Suggested Citation

  • The Anh Nguyen & Frank Thomas Seifried, 2021. "The Affine Rational Potential Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 24(06n07), pages 1-25, September.
    • Handle: RePEc:wsi:ijtafx:v:24:y:2021:i:06n07:n:s021902492150031x
    DOI: 10.1142/S021902492150031X
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