BFS 2002 |
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Contributed Talk |
Tomas Björk, Camilla Landen, Lars Svensson
We consider forward rate rate models of Heath-Jarrow-Morton 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 abstract realization theory developed by Björk and Svensson 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.