• Media type: E-Book; Report
  • Title: Finite dimensional Markovian realizations for stochastic volatility forward rate models
  • Contributor: Björk, Tomas [Author]; Landén, Camilla [Author]; Svensson, Lars [Author]
  • imprint: Stockholm: Stockholm School of Economics, The Economic Research Institute (EFI), 2002
  • Language: English
  • Keywords: stochastic volatility ; factor models ; forward rates ; Markovian realizations ; state space models ; infinite dimensional SDEs ; HJM models ; E43 ; G13
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  • Description: 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.
  • Access State: Open Access