An Extension of the Double Vasicek Model to Account for Stochastic Risk Premia

18 Pages Posted: 1 Nov 2014

See all articles by Riccardo Rebonato

Riccardo Rebonato

University of Oxford - Mathematical Institute

Date Written: October 30, 2014

Abstract

We present a stochastic-market-risk extension of a popular doubly-mean-reverting Vasicek model. The model straddles the P and Q measures. By allowing for a stochastic market price of risk, we break the determninisitc link between the return-predicting factor and the market-price of risk, but we retain, on average, the observed regularities reported in the literature. We also show how the model can be calibrated.

Keywords: affine models, market price of risk, return predicting factor

Suggested Citation

Rebonato, Riccardo, An Extension of the Double Vasicek Model to Account for Stochastic Risk Premia (October 30, 2014). Available at SSRN: https://ssrn.com/abstract=2516775 or http://dx.doi.org/10.2139/ssrn.2516775

Riccardo Rebonato (Contact Author)

University of Oxford - Mathematical Institute ( email )

United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
122
Abstract Views
401
rank
227,369
PlumX Metrics