Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/56071
Authors: 
Björk, Tomas
Blix, Magnus
Landén, Camilla
Year of Publication: 
2005
Series/Report no.: 
SSE/EFI Working Paper Series in Economics and Finance 620
Abstract: 
We consider HJM type models for the term structure of futures prices, where the volatility is allowed to be an arbitrary smooth functional of the present futures privce curve. Using a Lie algebraic approach we investigate when the infinite dimensional futures price process can be realized by a finite dimensional Markovian state space model, and we give general necessary and sufficient conditions, in terms of the volatility structure, for the existence of a finite dimensional realization. We study a number of concrefe applications including a recently developed model for gas futures. In particular we provide necessary and sufficient conditions for when the induced spot price is a Markov process. In particular we can prove that the only HJM type futures price models with spot price dependent volatility structures which generically possess a spot price realization are the affine ones. These models are thus the only generic spot price models from a futures price term structure point of view.
Subjects: 
futures contract
term structure
Lie algebra
finite dimensional realisation
JEL: 
G13
Document Type: 
Working Paper

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