What is the Natural Scale for a Lévy Process in Modelling Term Structure of Interest Rates? |
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| Authors: | Jirô Akahori Takahiro Tsuchiya |
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| Institution: | (1) Graduate School of Mathematics, Ritsumeikan University, 1-1-1 Nojihigashi, Kusatsu Shiga, 525-8577, Japan |
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| Abstract: | This paper gives examples of explicit arbitrage-free term structure models with Lévy jumps via the state price density approach.
By generalizing quadratic Gaussian models, it is found that the probability density function of a Lévy process is a “natural”
scale for the process to be the state variable of a market.
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| Keywords: | State price density approach Term structure models Shirakawa model Lévy process Probability density |
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