English, Article edition: ON FINITE DIMENSIONAL REALIZATIONS FOR THE TERM STRUCTURE OF FUTURES PRICES TOMAS BJÃRK; MAGNUS BLIX; CAMILLA LANDÃN

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Bookmark: http://trove.nla.gov.au/version/83339
Physical Description
  • article
Language
  • English

Edition details

Title
  • ON FINITE DIMENSIONAL REALIZATIONS FOR THE TERM STRUCTURE OF FUTURES PRICES
Author
  • TOMAS BJÃRK
  • MAGNUS BLIX
  • CAMILLA LANDÃN
Physical Description
  • article
Notes
  • We consider HJM type models for the term structure of futures prices, where the volatility is allowed to be an arbitrary smooth functional of the present futures price curve. Using a Lie algebraic approach we investigate when the infinite dimensional futures price process can be realized by a finite dimensional Markovian state space model, and we give general necessary and sufficient conditions, in terms of the volatility structure, for the existence of a finite dimensional realization. We study a number of concrete applications including a recently developed model for gas futures. In particular we provide necessary and sufficient conditions for when the induced spot price is a Markov process. In particular we can prove that the only HJM type futures price models with spot price dependent volatility structures which generically possess a spot price realization are the affine ones. These models are thus the only generic spot price models from a futures price term structure point of view.
  • HJM models, factor models, state space models, Markovian realizations
  • RePEc:wsi:ijtafx:v:09:y:2006:i:03:p:281-314
Language
  • English
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