Doctoral Thesis Defense, Optimization and Systems Theory
Friday, February 16, 2001, 10.00, Kollegiesalen, Administration building, Valhallavägen 79, KTH

Camilla Landén

On the term structure of forwards, futures and interest rates

Akademisk avhandling som med tillstånd av Kungliga Tekniska Högskolan framlägges till offentlig granskning för avläggande av teknologie doktorsexamen fredagen den 16 februari 2001 kl 10.00 i Kollegiesalen, Administrationsbyggnaden, Kungliga Tekniska Högskolan, Valhallavägen 79.

This thesis consists of four papers which all treat term structures, either of forwards and futures or of interest rates.

In the first paper we consider a diffusion type model for the short rate, where the the drift and diffusion coefficients are modulated by an underlying Markov process. The main objective of the paper is to study how bond pricing can be carried out in this framework, both when the underlying Markov process is observable and when it is not.

In the second paper we investigate when a model of the Heath-Jarrow-Morton-type (HJM) for the futures prices generically implies a Markovian spot price, that is when no matter which initial term structure is used for the futures prices, the spot price implied by the futures prices always satisfies a stochastic differential equation.

In the third paper we investigate the term structure of forward and futures prices for models in which the price processes are assumed to be driven by a multi-dimensional Wiener process and a general marked point process. For an infinite dimensional model of HJM-type of the futures and forward prices we study properties of the futures and forward convenience yield. We also study affine term structures, general pricing of futures options, and the problem of fitting a finite dimensional factor model to an observed initial futures price curve.

In the fourth paper we consider interest rate models of the HJM-type, where the forward rates are driven by a multi-dimensional Wiener process and the volatility is a smooth functional of the present forward rate curve. Building on earlier results in the field, concerning when such a model can be realized by a finite dimensional Markovian state space model, we present a general method to actually construct such a realization.

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Last update: January 24, 2001 by Anders Forsgren,