Solvable Affine Term Structure Models
19 Pages Posted: 19 Dec 2007
An Affine Term Structure Model (ATSM) is said to be solvable if the pricing problem has an explicit solution, i.e., the corresponding Riccati ordinary differential equations have a regular globally integrable flow. We identify the parametric restrictions which are necessary and sufficient for an ATSM with continuous paths, to be solvable in a state space, where the domain of positive factors, has the geometry of a symmetric cone. This class of state spaces includes as special cases those introduced by Duffie and Kan (1996), and Wishart term structure processes discussed by Gourieroux and Sufana (2003). For all solvable models we provide the procedure to find the explicit solution of the Riccati ODE.
Suggested Citation: Suggested Citation