European Business Schools Librarian's Group

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 498: Finite dimensional Markovian realizations for stochastic volatility forward rate models

Tomas Björk (), Camilla Landén and Lars Svensson ()
Additional contact information
Tomas Björk: Dept. of Finance, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Camilla Landén: Länsförsäkringar Liv, Postal: Länsförsäkringar Liv, SE-173 81 Stockholm, Sweden
Lars Svensson: Department of Mathematics, Royal Institute of Technology, Postal: Department of Mathematics, KTH, SE-100 44 Stockholm, Sweden

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 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.

Keywords: HJM models; stochastic volatility; factor models; forward rates; state space models; Markovian realizations; infinite dimensional SDEs

JEL-codes: E43; G13

47 pages, First version: April 29, 2002. Revised: May 7, 2002. Earlier revisions: May 6, 2002.

Full text files 

hastef0498.pdf PDF-file Full text

Download statistics

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 ().

RePEc:hhs:hastef:0498This page generated on 2024-09-13 22:19:41.