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What is the natural scale for a L\'evy process in modelling term structure of interest rates?

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  • Jir^o Akahori
  • Takahiro Tsuchiya

Abstract

This paper gives examples of explicit arbitrage-free term structure models with L\'evy jumps via state price density approach. By generalizing quadratic Gaussian models, it is found that the probability density function of a L\'evy process is a "natural" scale for the process to be the state variable of a market.

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  • Jir^o Akahori & Takahiro Tsuchiya, 2006. "What is the natural scale for a L\'evy process in modelling term structure of interest rates?," Papers math/0612341, arXiv.org.
    • Handle: RePEc:arx:papers:math/0612341
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    Cited by:

    1. Jiro Akahori & Yuji Hishida & Josef Teichmann & Takahiro Tsuchiya, 2009. "A Heat Kernel Approach to Interest Rate Models," Papers 0910.5033, arXiv.org.
    2. Yuta Inoue & Takahiro Tsuchiya, 2011. "Defaultable Bonds via HKA," Papers 1103.4541, arXiv.org.

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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