Endogenous interest rate dynamics in asset markets
- Reiß, Oliver
- Schoenmakers, John G. M.
- Schweizer, Martin
2010 Mathematics Subject Classification
- 91B28 60G35 91B70
- asset market, interest rates, market structure, asset indices, endogenous dynamic relations
Starting from a general Ito process model with more assets than driving Brownian motions, we study the term structure model endogenously induced by this complete market. In the Markovian diffusion case, we provide the resulting HJM description and point out a link to finite factor models. But the main contribution is the conceptual approach of considering assets and interest rates within one model which is completely specified by the assets alone. This allows endogenous derivations of dynamic relations between assets and interest rates from global structural assumptions (homogeneity and some spherical symmetry) on the market. Related issues in financial market modelling have been studied by E. Platen.
- Journal of Economic Dynamics & Control, 31, 2007, 593-612, under new title: From Structual Assumptions to a Link between Assets and Interest Rates.