Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/287325 
Year of Publication: 
2021
Citation: 
[Journal:] Mathematics and Financial Economics [ISSN:] 1862-9660 [Volume:] 16 [Issue:] 2 [Publisher:] Springer [Place:] Berlin, Heidelberg [Year:] 2021 [Pages:] 317-343
Publisher: 
Springer, Berlin, Heidelberg
Abstract: 
In this paper, we study term structure movements in the spirit of Heath et al. (Econometrica 60(1):77–105, 1992) under volatility uncertainty. We model the instantaneous forward rate as a diffusion process driven by a G-Brownian motion. The G-Brownian motion represents the uncertainty about the volatility. Within this framework, we derive a sufficient condition for the absence of arbitrage, known as the drift condition. In contrast to the traditional model, the drift condition consists of several equations and several market prices, termed market price of risk and market prices of uncertainty, respectively. The drift condition is still consistent with the classical one if there is no volatility uncertainty. Similar to the traditional model, the risk-neutral dynamics of the forward rate are completely determined by its diffusion term. The drift condition allows to construct arbitrage-free term structure models that are completely robust with respect to the volatility. In particular, we obtain robust versions of classical term structure models.
Subjects: 
Term structure of interest rates
No-arbitrage
Ambiguous volatility
Knightian uncertainty
Model uncertainty
Robust finance
JEL: 
G30
G12
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.