Alpha-CIR Model with Branching Processes in Sovereign Interest Rate Modelling

Ying Jiao (1) , Chunhua Ma (2) , Simone Scotti (3)

1 UCBL - Université Claude Bernard Lyon 1
2 Nankai University, School of mathematical sciences
3 LPMA - Laboratoire de Probabilités et Modèles Aléatoires

We introduce a class of interest rate models, called the α-CIR model, which gives a natural extension of the standard CIR model by adopting the α-stable Lévy process and preserving the branching property. This model allows to describe in a unified and parsimonious way several recent observations on the sovereign bond market such as the persistency of low interest rate together with the presence of large jumps at local extent. We emphasize on a general integral representation of the model by using random fields, with which we establish the link to the CBI processes and the affine models. Finally we analyze the jump behaviors and in particular the large jumps, and we provide numerical illustrations.

Domaines: Finance quantitative [q-fin.CP]

Ying Jiao, Chunhua Ma, Simone Scotti. Alpha-CIR Model with Branching Processes in Sovereign Interest Rate Modelling. 2016. ⟨hal-01275397v1⟩