Suppose the (vector) Markov process Xt, has the following dynamics, where the error term is jointly normal
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Suppose the (vector) Markov process Xt,
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 r1 a Markov process?(c) Under what conditions, if any, would the univariate process r heMarkov?
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Related Book For
An Introduction to the Mathematics of financial Derivatives
ISBN: 978-0123846822
2nd Edition
Authors: Salih N. Neftci
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