Affine Processes on Positive Semidefinite Matrices

Abstract

This paper provides the mathematical foundation for stochastically continuous affine processes on the cone of positive semidefinite symmetric matrices. These matrix-valued affine processes have arisen from a large and growing range of useful applications in finance, including multi-asset option pricing with stochastic volatility and correlation structures, and fixed-income models with stochastically correlated risk factors and default intensities.

Keywords: affine process, stochastic correlation, term structure

JEL Classification: C60, G12, G13