S-WoPEc
 
Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 569:
On Finite Dimensional Realizations of Forward Price Term Structure Models

Raquel M. Gaspar ()

Abstract: In this paper we study a fairly general Wiener driven model for the term structure of forward prices. The model, under a fixed martingale measure, Q, consists of two infinite dimensional stochastic differential equations (SDEs). The first system is a standard HJM model for (forward) interest rates, driven by a multidimensional Wiener process W. The second system is an infinite SDE for the term structure of forward prices on some specified underlying asset driven by the same W. We are primarily interested in the forward prices. However, since for any fixed maturity, T, the forward price process is a martingale under the T-forward neutral measure, the zero coupon bond volatilities will enter into the drift part of the SDE for these forward prices. The interest rate system is, thus, needed as input into the forward price system. Given this setup we use the Lie algebra methodology of Björk et al. to investigate under what conditions on the volatility structure of the forward prices and/or interest rates, the inherently (doubly) infinite dimensional SDE for forward prices can be realized by a finite dimensional Markovian state space model.

Keywords: Forward prices; term structures; state space models; Markovian realizations; HJM models; (follow links to similar papers)

JEL-Codes: E43; G13; (follow links to similar papers)

49 pages, September 30, 2004

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

hastef0569.pdf    PDF-file (415kB) 
Download Statistics
This paper is forthcoming as:
M. Gaspar, Raquel, 'On Finite Dimensional Realizations of Forward Price Term Structure Models', in , (ed.) Proceedings of the Stochastic Finance 2004 Conference, Springer-Verlag



Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:hastef:0569 This page was generated on 2014-12-14 19:23:06