STOCHASTIC HYPERBOLIC DYNAMICS FOR INFINITE-DIMENSIONAL FORWARD RATES AND OPTION PRICING |
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| Authors: | Shin Ichi Aihara Arunabha Bagchi |
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| Affiliation: | Department of Mechanics and Systems Design, Tokyo University of Science, Suwa; FELab and Department of Applied Mathematics, University of Twente, Enschede |
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| Abstract: | We model the term-structure modeling of interest rates by considering the forward rate as the solution of a stochastic hyperbolic partial differential equation. First, we study the arbitrage-free model of the term structure and explore the completeness of the market. We then derive results for the pricing of general contingent claims. Finally we obtain an explicit formula for a forward rate cap in the Gaussian framework from the general results. |
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| Keywords: | stochastic hyperbolic systems completeness European options option pricing |
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