Arbitrage-Free Gaussian Affine Term Structure Model with Observable Factors

Abstract

This paper analyzes a simple discrete-time affine multifactor model of the term structure of interest rates in which the pricing factors that follow a Gaussian first-order vector autoregression are observable and there are no possibilities for risk-free arbitrage. We present the theoretical results for the compatible risk-neutral dynamics of observable factors in a maximally flexible way consistent with no-arbitrage under the assumption that the factor loadings of some yields are specified exogenously.

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Wang, G. (2015) Arbitrage-Free Gaussian Affine Term Structure Model with Observable Factors. Journal of Mathematical Finance, 5, 142-152. doi: 10.4236/jmf.2015.52013.

Conflicts of Interest

The authors declare no conflicts of interest.

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