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Department of Finance, Copenhagen Business School Working Paper Series, Department of Finance, Copenhagen Business School

No 2005-5:
Term Structure Models with Parallel and Proportional Shifts

Frederik Armerin (), Tomas Björk () and Bjarne Astrup Jensen ()

Abstract: We investigate the possibility of an arbitrage free model for the term structure of interest rates where the yield curve only changes through a parallel shift. We consider HJM type forward rate models driven by a multidimensionalWiener process as well as by a general marked point process. Within this general framework we show that there does indeed exist a large variety of nontrivial parallel shift term structure models, and we also describe these in detail. We also show that there exists no nontrivial flat term structure model. The same analysis is repeated for the similar case, where the yield curve only changes through proportional shifts.

Keywords: bond market; term structure of interest rates; flat term structures; (follow links to similar papers)

JEL-Codes: G00; (follow links to similar papers)

23 pages, October 26, 2005

Forthcoming in Applied Mathematical Finance

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This paper is published as:
Armerin, Frederik, Tomas Björk and Bjarne Astrup Jensen, (2007), 'Term Structure Models with Parallel and Proportional Shifts', Applied Mathematical Finance, Vol. 14, No. 3, pages 243-260



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