Time-Consistent No-Arbitrage Models of the Term Structure

Fractional Term Structure Models: No-arbitrage and Consistency

In this work we introduce Heath-Jarrow-Morton (HJM) interest rate models driven by fractional Brownian motions. By using support arguments we prove that the resulting model is arbitrage-free under proportional transaction costs in the same spirit of Guasoni et al [14, 15]. In particular, we obtain a drift condition which is similar in nature to the classical HJM no-arbitrage drift restriction. ...

Lévy term structure models: No-arbitrage and completeness

SUMMARY: We study the term structure models which are driven by a Lévy process, from the point of view of arbitrage and completeness. Exactly as for the Heath–Jarrow–Morton model, which fits into our class of models, we observe that the conditions on the coefficients for having no arbitrage opportunity are rather stringent. For the completeness problem, the results are quite surprising: namely ...

Forecasting the Yield Curve using Priors from No Arbitrage Affine Term Structure Models

In this paper we propose a strategy for forecasting the term structure of interest rates which may produce significant gains in predictive accuracy. The key idea is to use the restrictions implied by Affine Term Structure Models (ATSM) on a vector autoregression (VAR) as prior information rather than imposing them dogmatically. This allows to account for possible model misspecification. We appl...

Review of Continuous-Time Term-Structure Models Part II: Arbitrage-Free Models

Complete Characterisation of Arbitrage Free Affine Term Structure Models

It is widely believed that the results in Duffie and Kan (1996) provide the necessary and sufficient conditions for a multifactor model of the term structure of interest rates to admit an affine representation. It is shown here that, in fact, only sufficient conditions are given by Duffie and Kan, and there are families of affine models that do not fall into the Duffie-Kan characterisation. A m...