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Finance and Stochastics

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07-06-2017

Alpha-CIR model with branching processes in sovereign interest rate modeling

Authors: Ying Jiao, Chunhua Ma, Simone Scotti

Published in: Finance and Stochastics | Issue 3/2017

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Abstract

We introduce a class of interest rate models, called the \(\alpha\)-CIR model, which is a natural extension of the standard CIR model by adding a jump part driven by \(\alpha\)-stable Lévy processes with index \(\alpha\in(1,2]\). We deduce an explicit expression for the bond price by using the fact that the model belongs to the family of CBI and affine processes, and analyze the bond price and bond yield behaviors. The \(\alpha\)-CIR model allows us to describe in a unified and parsimonious way several recent observations on the sovereign bond market such as the persistency of low interest rates together with the presence of large jumps. Finally, we provide a thorough analysis of the jumps, and in particular the large jumps.

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Title: Alpha-CIR model with branching processes in sovereign interest rate modeling
Authors: Ying Jiao
Chunhua Ma
Simone Scotti
Publication date: 07-06-2017
Publisher: Springer Berlin Heidelberg
Published in: Finance and Stochastics / Issue 3/2017
Print ISSN: 0949-2984
Electronic ISSN: 1432-1122
DOI: https://doi.org/10.1007/s00780-017-0333-7

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