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research article

A Note on the Neslon-Siegel Familly

Filipovic, Damir  
1999
Mathematical Finance

We study a problem posed in Bjork and Christensen (1999): does there exist any nontrivial interest rate model which is consistent with the Nelson-Siegel family? They show that within the HJM framework with deterministic volatility structure the answer is no.In this paper we give a generalized version of this result including stochastic volatility structure. For that purpose we introduce the class of consistent state space processes, which have the property to provide an arbitrage-free interest rate model when representing the parameters of the Nelson-Siegel family. We characterize the consistent state space Ito processes in terms of their drift and diffusion coefficients. By solving an inverse problem we find their explicit form. It turns out that there exists no nontrivial interest rate model driven by a consistent state space Ito process.

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Type
research article
DOI
10.1111/1467-9965.00073
Author(s)
Filipovic, Damir  
Date Issued

1999

Publisher

Wiley-Blackwell

Published in
Mathematical Finance
Volume

9

Issue

4

Start page

349

End page

359

Editorial or Peer reviewed

REVIEWED

Written at

OTHER

EPFL units
CSF  
Available on Infoscience
April 25, 2010
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/49697
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