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The Term Structure of Simple Forward Rates with Jump Risk (2002)
| Venue: | Jump Risk.” Mathematical Finance |
| Citations: | 43 - 5 self |
BibTeX
@ARTICLE{Glasserman02theterm,
author = {Paul Glasserman and S. G. Kou},
title = {The Term Structure of Simple Forward Rates with Jump Risk},
journal = {Jump Risk.” Mathematical Finance},
year = {2002},
volume = {3},
pages = {383--410}
}
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Abstract
This paper characterizes the arbitrage-free dynamics of interest rates, in the presence of both jumps and diffusion, when the term structure is modeled through simple forward rates (i.e., through discretely compounded forward rates evolving continuously in time) or forward swap rates. Whereas instantaneous continuously compounded rates form the basis of most traditional interest rate models, simply compounded rates and their parameters are more directly observable in practice and are the basis of recent research on "market models." We consider very general types of jump processes, modeled through marked point processes, allowing randomness in jump sizes and dependence between jump sizes, jump times, and interest rates. We make explicit how jump and diffusion risk premia enter into the dynamics of simple forward rates.
