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Title:Finite dimensional Markovian realizations for stochastic volatility forward rate models PDF Logo
Authors:Björk, Tomas
Landén, Camilla
Svensson, Lars
Issue Date:2002
Series/Report no.:SSE/EFI Working Paper Series in Economics and Finance 498
Abstract:We consider forward rate rate models of HJM type, as well as more general infinite dimensional SDEs, where the volatility/diffusion term is stochastic in the sense of being driven by a separate hidden Markov process. Within this framework we use the previously developed Hilbert space realization theory in order provide general necessary and sufficent conditions for the existence of a finite dimensional Markovian realizations for the stochastic volatility models. We illustrate the theory by analyzing a number of concrete examples.
Subjects:HJM models
stochastic volatility
factor models
forward rates
state space models
Markovian realizations
infinite dimensional SDEs
JEL:E43
G13
Document Type:Working Paper
Appears in Collections:SSE/EFI Working Paper Series in Economics and Finance, EFI - The Economic Research Institute, Stockholm School of Economics

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