A General Characterization of One Factor Affine Term Structure Models

We give a complete characterization of affine term structure models based on a general nonnegative Markov short rate process. This applies to the classical CIR model but includes as well short rate processes with jumps.We provide a link to the theory of branching processes and show how CBI-processes naturally enter the field of term structure modelling. Using Markov semigroup theory we exploit the full structure behind an affine term structure model and provide a deeper understanding of some well-known properties of the CIR model. Based on these fundamental results we construct a new short rate model with jumps, which extends the CIR model and still gives closed form expressions for bond options.


Published in:
Finance and Stochastics, 5, 389-412
Year:
2001
Publisher:
Springer Verlag
ISSN:
0949-2984
Laboratories:




 Record created 2010-04-25, last modified 2018-03-17

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