Suppose the (vector) Markov process Xt, has the following dynamics, where the error term is jointly normal
Question:
has the following dynamics,
where the error term is jointly normal and serially uncorrelated. Suppose rt is a short rate, while Rt is a long rate.
(a) Derive a univariate representation for the short rate rt.
(b) According to this representation, is rt a Markov process?
(c) Under what conditions, if any, would the univariate process rt be Markov?
Transcribed Image Text:
Rf Tt+A α11 012 | | rt
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a A univariate representation for the short rate is provided ...View the full answer
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Ali Khawaja
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Related Book For
An Introduction to the Mathematics of Financial Derivatives
ISBN: 978-0123846822
3rd edition
Authors: Ali Hirsa, Salih N. Neftci
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