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
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: Suggested Citation
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