What is the natural scale for a Lévy process in modelling term structure of interest rates?
Jirô Akahori, Takahiro Tsuchiya
Abstract
This paper gives examples of explicit arbitrage-free term structure models with Lévy jumps via 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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