A pure-jump mean-reverting short rate model
A new multi-factor short rate model is presented which is bounded from below by a real-valued function of time. The mean-reverting short rate process is modeled by a sum of pure-jump Ornstein--Uhlenbeck processes such that the related bond prices possess affine representations. Also the dynamics of the associated instantaneous forward rate is provided and a condition is derived under which the model can be market-consistently calibrated. The analytical tractability of this model is illustrated by the derivation of an explicit plain vanilla option price formula. With view on practical applications, suitable probability distributions are proposed for the driving jump processes. The paper is concluded by presenting a post-crisis extension of the proposed short and forward rate model.
Code (0)
등록된 구현이 없습니다.
Tasks
modelSimilar Papers 제목 키워드 기반
Fast Pricing of Energy Derivatives with Mean-reverting Jump-diffusion Processes
Most energy and commodity markets exhibit mean-reversion and occasional distinctive price spikes, which results in demand for derivative products which protect the holder against high prices. To this end, in this paper w…
Monte Carlo Simulation for Trading Under a Lévy-Driven Mean-Reverting Framework
We present a Monte Carlo approach to pairs trading on mean-reverting spreads modeled by L\'evy-driven Ornstein-Uhlenbeck processes. Specifically, we focus on using a variance gamma driving process, an infinite activity p…
A Mean-Reverting Model of Exchange Rate Risk Premium Using Ornstein-Uhlenbeck Dynamics
This paper examines the empirical failure of uncovered interest parity (UIP) and proposes a structural explanation based on a mean-reverting risk premium. We define a realized premium as the deviation between observed ex…
Hermite Polynomial-based Valuation of American Options with General Jump-Diffusion Processes
We present a new approximation scheme for the price and exercise policy of American options. The scheme is based on Hermite polynomial expansions of the transition density of the underlying asset dynamics and the early e…
Short-time behavior of the At-The-Money implied volatility for the jump-diffusion stochastic volatility Bachelier model
In this paper we use Malliavin Calculus techniques in order to obtain expressions for the short-time behavior of the at-the-money implied volatility (ATM-IV) level and skew for a jump-diffusion stock price. The diffusion…