Kernel-Correlated Lévy Field Driven Forward Rate and Application to Derivative Pricing

Kernel-Correlated Lévy Field Driven Forward Rate and Application to Derivative Pricing We propose a term structure of forward rates driven by a kernel-correlated Lévy random field under the HJM framework. The kernel-correlated Lévy random field is composed of a kernel-correlated Gaussian random field and a centered Poisson random measure. We shall give a criterion to preclude arbitrage under the risk-neutral pricing measure. As applications, an interest rate derivative with general payoff functional is priced under this pricing measure. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematics and Optimization Springer Journals

Kernel-Correlated Lévy Field Driven Forward Rate and Application to Derivative Pricing

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Publisher
Springer US
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Mathematics; Calculus of Variations and Optimal Control; Optimization; Systems Theory, Control; Theoretical, Mathematical and Computational Physics; Mathematical Methods in Physics; Numerical and Computational Physics
ISSN
0095-4616
eISSN
1432-0606
D.O.I.
10.1007/s00245-013-9196-2
Publisher site
See Article on Publisher Site

Abstract

We propose a term structure of forward rates driven by a kernel-correlated Lévy random field under the HJM framework. The kernel-correlated Lévy random field is composed of a kernel-correlated Gaussian random field and a centered Poisson random measure. We shall give a criterion to preclude arbitrage under the risk-neutral pricing measure. As applications, an interest rate derivative with general payoff functional is priced under this pricing measure.

Journal

Applied Mathematics and OptimizationSpringer Journals

Published: Aug 1, 2013

References

  • Stochastic risk premiums, stochastic skewness in currency options, and stochastic discount factors in international economies
    Bakshi, G.; Carr, P.; Wu, L.

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