Generalizing the Affine Framework to HJM and Random Field Models

We identify a class of term structure models possessing a generalized affine-structure that significantly extends the class studied by Duffie, Pan, and Singleton (2000) and Chacko and Das (2002). This class of models, which includes both infinite-state-variable (i.e., HJM-type) and infinite-factor (random field) models, possesses analytic solutions for the characteristic function, which in turn provides closed-form solutions for many types of fixed income derivatives. In addition, the generalized affine framework provides analytic solutions to the optimal portfolio choice problem. In a random field setting, the optimal portfolio decision is unique, in turn providing a justification for 'preferred habitat' theories.


Year:
2003
Publisher:
Columbia Business School
Keywords:
Laboratories:




 Record created 2013-08-08, last modified 2018-03-17


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