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One-dimensional Markov-functional models driven by a non-Gaussian driver
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Gogala, Jaka and Kennedy, Joanne E. (2019) One-dimensional Markov-functional models driven by a non-Gaussian driver. Journal of Computational Finance, 23 (3). pp. 61-100. doi:10.21314/JCF.2019.377 ISSN 1460-1559.
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WRAP-one-dimensional-markov-functional-models-driven-non-gaussian-driver-Kennedy-2019.pdf - Accepted Version Embargoed item. Restricted access to Repository staff only - Requires a PDF viewer. Download (1542Kb) |
Official URL: https://doi.org/10.21314/JCF.2019.377
Abstract
The class of Markov-functional models provide a framework that can be used to define interest-rate models of finite dimension calibrated to any arbitrage-free formula for caplet or swaption prices. Because of their computational eciency one-factor Markov-functional models are of particular interest. So far the literature has been focused on models driven by a Gaussian process. The aim of this paper is to move away from this Gaussian assumption and to provide new algorithms that can be used to implement a Markov-functional model driven by a more general class of one-dimensional diusion processes. We provide additional insight into the role of the driving process by presenting a simple copula-based criterion that can be used to distinguish between models. Finally we oer further insight into the dynamics of one-dimensional Markov-functional models by relating them to separable local-volatility LIBOR market models and demonstrate this with a practical example.
| Item Type: | Journal Article | ||||||
|---|---|---|---|---|---|---|---|
| Divisions: | Faculty of Science, Engineering and Medicine > Science > Statistics | ||||||
| Journal or Publication Title: | Journal of Computational Finance | ||||||
| Publisher: | Incisive Media Ltd. | ||||||
| ISSN: | 1460-1559 | ||||||
| Official Date: | 9 December 2019 | ||||||
| Dates: |
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| Volume: | 23 | ||||||
| Number: | 3 | ||||||
| Page Range: | pp. 61-100 | ||||||
| DOI: | 10.21314/JCF.2019.377 | ||||||
| Status: | Peer Reviewed | ||||||
| Publication Status: | Published | ||||||
| Access rights to Published version: | Restricted or Subscription Access | ||||||
| Date of first compliant deposit: | 16 May 2019 | ||||||
| Related URLs: |
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