nep-fmk New Economics Papers
on Financial Markets
Issue of 2007‒06‒30
one paper chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Pricing under the Real-World Probability Measure for Jump-Diffusion Term Structure Models By Nicola Bruti-Liberati; Christina Nikitopoulos-Sklibosios; Eckhard Platen

  1. By: Nicola Bruti-Liberati (School of Finance and Economics, University of Technology, Sydney); Christina Nikitopoulos-Sklibosios (School of Finance and Economics, University of Technology, Sydney); Eckhard Platen (School of Finance and Economics, University of Technology, Sydney)
    Abstract: This paper considers interest rate term structure models in a market attracting both continuous and discrete types of uncertainty. The event driven noise is modelled by a Poisson random measure. Using as numeraire the growth optimal portfolio, interest rate derivatives are priced under the real-world probability measure. In particular, the real-world dynamics of the forward rates are derived and, for specific volatility structures, finite dimensional Markovian representations are obtained. Furthermore, allowing for a stochastic short rate, a class of tractable affine term structures is derived where an equivalent risk-neutral probability measure does not exist.
    Keywords: jump diffusions; affine term structure; real-world pricing; growth optimal portfolio; benchmark approach; HJM
    JEL: G10 G13
    Date: 2007–06–01

This nep-fmk issue is ©2007 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.