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Efficient and exact simulation of the Gaussian affine interest rate models

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  • Vladimir Ostrovski

    (Economic Scenarios and Valuation Team, Talanx Asset Management, Talanx Group Charles-de-Gaulle-Platz 1, 50679 Cologne, Germany)

Abstract

The Gaussian affine interest rate models are widely used in the financial industry for pricing, hedging and also risk management purposes. We consider the multifactor models with time dependent parameters. Usually the models are simulated using some appropriate discretization schema because the joint distribution of the stochastic and discounting factors is not known. We derive the exact joint conditional distribution of the stochastic and discounting factors. Additionally we show how an efficient and exact Monte Carlo simulation of the Gaussian affine interest rate models could be performed.

Suggested Citation

  • Vladimir Ostrovski, 2016. "Efficient and exact simulation of the Gaussian affine interest rate models," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-11, June.
    • Handle: RePEc:wsi:ijfexx:v:03:y:2016:i:02:n:s2424786316500092
    DOI: 10.1142/S2424786316500092
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    References listed on IDEAS

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    Cited by:

    1. Fazlollah Soleymani & Andrey Itkin, 2019. "Pricing foreign exchange options under stochastic volatility and interest rates using an RBF--FD method," Papers 1903.00937, arXiv.org.
    2. Francesco Strati & Luca G. Trussoni, 2020. "Exact cash-account deflator for the G2++ model," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 1-14, March.

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