Heat modulated affine stochastic volatility models for forward curve dynamics
| Autor: | Karbach, Sven |
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| Rok vydání: | 2024 |
| Předmět: | |
| Druh dokumentu: | Working Paper |
| Popis: | We present a function-valued stochastic volatility model designed to capture the continuous-time evolution of forward curves in fixed-income or commodity markets. The dynamics of the (logarithmic) forward curves are defined by a Heath-Jarrow-Morton-Musiela stochastic partial differential equation modulated by an instantaneous volatility process that describes the second-order moment structure of forwards with different time-to-maturity. We propose to model the operator-valued instantaneous covariance by an affine process on the cone of positive trace-class operators with drift given by the Lyapunov operator of the Laplacian. The so defined infinite-rank stochastic volatility model is analytically tractable due to its affine structure and allows to model maturity specific risk and volatility clustering in forward markets. Furthermore, we introduce a numerically feasible spectral Galerkin approximation of the associated operator-valued generalized Riccati equations and study the robustness of the model with respect to finite-rank approximations by providing explicit error bounds on the approximation error. Comment: 31 pages |
| Databáze: | arXiv |
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