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Separable Term Structures And The Maximal Degree Problem

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  • Damir Filipović

Abstract

This paper discusses separablc term structure diffusion models in an arbitrage‐free environment. Using general consistency results we exploit the interplay between the diffusion coefficients and the functions determining the forward curve. We introduce the particular class of polynomial term structure models. We formulate the appropriate conditions under which the diffusion for a quadratic term structure model is necessarily an Ornstein‐Uhlenbeck type process. Finally, we explore the maximal degree problem and show that basically any consistent polynomial term structure model is of degree two or less.

Suggested Citation

  • Damir Filipović, 2002. "Separable Term Structures And The Maximal Degree Problem," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 341-349, October.
    • Handle: RePEc:bla:mathfi:v:12:y:2002:i:4:p:341-349
    DOI: 10.1111/j.1467-9965.2002.tb00128.x
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    Cited by:

    1. Peng Cheng & Olivier Scaillet, 2002. "Linear-Quadratic Jump-Diffusion Modeling with Application to Stochastic Volatility," FAME Research Paper Series rp67, International Center for Financial Asset Management and Engineering.
    2. Erhan Bayraktar & Li Chen & H. Vincent Poor, 2005. "Consistency Problems for Jump-diffusion Models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 12(2), pages 101-119.
    3. Gaspar, Raquel M., 2004. "General Quadratic Term Structures of Bond, Futures and Forward Prices," SSE/EFI Working Paper Series in Economics and Finance 559, Stockholm School of Economics.
    4. Gaspar, Raquel M. & Schmidt, Thorsten, 2005. "Quadratic Portfolio Credit Risk models with Shot-noise Effects," SSE/EFI Working Paper Series in Economics and Finance 616, Stockholm School of Economics.
    5. Si Cheng & Michael R. Tehranchi, 2014. "Polynomial Term Structure Models," Papers 1404.6190, arXiv.org, revised Mar 2016.

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