Kernel-Correlated Levy Field Driven Forward Rate and Application to Derivative Pricing

Applied Mathematics and Optimization, Forthcoming

20 Pages Posted: 26 Jun 2013 Last revised: 9 Dec 2015

See all articles by Lijun Bo

Lijun Bo

University of Science and Technology of China (USTC)

Yongjin Wang

Nankai University - Business School

Xuewei Yang

Nanjing University - School of Management and Engineering; Nanjing University - Institute of New Finance

Date Written: June 25, 2013

Abstract

We propose a term structure of forward rates driven by a kernel-correlated Levy random field under the HJM framework. The kernel-correlated Levy random field is composed of a kernel-correlated Gaussian random field and a centered Poisson random measure. We shall give a criterion to preclude arbitrage under the riskneutral pricing measure. As applications, an interest rate derivative with general payoff functional is priced under this pricing measure.

Keywords: Forward interest rate, Kernel-correlated L'evy field, HJM model, Derivative pricing

JEL Classification: C60

Suggested Citation

Bo, Lijun and Wang, Yongjin and Yang, Xuewei, Kernel-Correlated Levy Field Driven Forward Rate and Application to Derivative Pricing (June 25, 2013). Applied Mathematics and Optimization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2284633

Lijun Bo

University of Science and Technology of China (USTC) ( email )

96, Jinzhai Road
Hefei, Anhui 230026
China

Yongjin Wang

Nankai University - Business School ( email )

94 Weijin Road, Nankai District
Tianjin, 300071
China

Xuewei Yang (Contact Author)

Nanjing University - School of Management and Engineering ( email )

22 Hankou Road, Gulou District
Nanjing, Jiangsu 210093
China

Nanjing University - Institute of New Finance ( email )

Nanjing, Jiangsu 210093
China

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