SSE/EFI Working Paper Series in Economics and Finance
Finite dimensional Markovian realizations for stochastic volatility forward rate models
(), Camilla Landén and Lars Svensson
Abstract: We consider forward rate rate models of HJM type, as well
as more general infinite dimensional SDEs, where the volatility/diffusion
term is stochastic in the sense of being driven by a separate hidden Markov
Within this framework we use the previously developed Hilbert
space realization theory in order provide general necessary and sufficent
conditions for the existence of a finite dimensional Markovian realizations
for the stochastic volatility models. We illustrate the theory by analyzing
a number of concrete examples.
Keywords: HJM models; stochastic volatility; factor models; forward rates; state space models; Markovian realizations; infinite dimensional SDEs; (follow links to similar papers)
JEL-Codes: E43; G13; (follow links to similar papers)
47 pages, April 29, 2002, Revised May 7, 2002
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