Finite dimensional Markovian realizations for stochastic volatility forward rate models

Tomas Björk; Camilla Landén; Lars Svensson

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 process. 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. -- HJM models ; stochastic volatility ; factor models ; forward rates ; state space models ; Markovian realizations ; infinite dimensional SDEs

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Year of publication:	06 May 2002 ; [Elektronische Ressource], This version: May 6, 2002
Other Persons:	Björk, Tomas (contributor) ; Landén, Camilla (contributor) ; Svensson, Lars E. O. (contributor)
Institutions:	Ekonomiska forskningsinstitutet <Stockholm> (contributor)
Publisher:	Stockholm : Ekonomiska Forskningsinst.
Subject:	Markov-Kette \| Markov chain \| Volatilität \| Volatility \| Theorie \| Theory \| Zinsstruktur \| Yield curve \| Zinsderivat \| Interest rate derivative \| Stochastischer Prozess \| Stochastic process \| Derivat \| Derivative \| CAPM