English, Article edition: AFFINE PROCESSES, ARBITRAGE-FREE TERM STRUCTURES OF LEGENDRE POLYNOMIALS, AND OPTION PRICING CAIO IBSEN RODRIGUES DE ALMEIDA

User activity

Share to:
 
Bookmark: http://trove.nla.gov.au/version/83251
Physical Description
  • article
Language
  • English

Edition details

Title
  • AFFINE PROCESSES, ARBITRAGE-FREE TERM STRUCTURES OF LEGENDRE POLYNOMIALS, AND OPTION PRICING
Author
  • CAIO IBSEN RODRIGUES DE ALMEIDA
Physical Description
  • article
Notes
  • Multivariate Affine term structure models have been increasingly used for pricing derivatives in fixed income markets. In these models, uncertainty of the term structure is driven by a state vector, while the short rate is an affine function of this vector. The model is characterized by a specific form for the stochastic differential equation (SDE) for the evolution of the state vector. This SDE presents restrictions on its drift term which rule out arbitrages in the market. In this paper we solve the following inverse problem: Suppose the term structure of interest rates is modelled by a linear combination of Legendre polynomials with random coefficients. Is there any SDE for these coefficients which rules out arbitrages? This problem is of particular empirical interest because the Legendre model is an example of factor model with clear interpretation for each factor, in which regards movements of the term structure. Moreover, the Affine structure of the Legendre model implies knowledge of its conditional characteristic function. From the econometric perspective, we propose arbitrage-free Legendre models to describe the evolution of the term structure. From the pricing perspective, we follow Duffie et al. [22] in exploring their conditional characteristic functions to obtain a computational tractable method to price fixed income derivatives.
  • Consistent term structure models, Multifactor affine processes, Legendre polynomials, derivatives pricing
  • RePEc:wsi:ijtafx:v:08:y:2005:i:02:p:161-184
Language
  • English
Contributed by
OAIster

Get this edition

  • Set up My libraries

    How do I set up "My libraries"?

    In order to set up a list of libraries that you have access to, you must first login or sign up. Then set up a personal list of libraries from your profile page by clicking on your user name at the top right of any screen.

  • All (1)
  • Unknown (1)
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.

User activity


e.g. test cricket, Perth (WA), "Parkes, Henry"

Separate different tags with a comma. To include a comma in your tag, surround the tag with double quotes.

Be the first to add a tag for this edition

Be the first to add this to a list

Comments and reviews

What are comments? Add a comment

No user comments or reviews for this version

Add a comment