New Economics Papers
on Financial Markets
Issue of 2007‒06‒30
one paper chosen by

  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

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