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Stochastic string models with continuous semimartingales

Author

Listed:
  • Bueno-Guerrero, Alberto
  • Moreno, Manuel
  • Navas, Javier F.
Abstract
This paper reformulates the stochastic string model of Santa-Clara and Sornette using stochastic calculus with continuous semimartingales. We present some new results, such as: (a) the dynamics of the short-term interest rate, (b) the PDE that must be satisfied by the bond price, and (c) an analytic expression for the price of a European bond call option. Additionally, we clarify some important features of the stochastic string model and show its relevance to price derivatives and the equivalence with an infinite dimensional HJM model to price European options.

Suggested Citation

  • Bueno-Guerrero, Alberto & Moreno, Manuel & Navas, Javier F., 2015. "Stochastic string models with continuous semimartingales," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 433(C), pages 229-246.
    • Handle: RePEc:eee:phsmap:v:433:y:2015:i:c:p:229-246
    DOI: 10.1016/j.physa.2015.03.070
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    References listed on IDEAS

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    Cited by:

    1. Alberto Bueno-Guerrero & Steven P. Clark, 2023. "Option Pricing under a Generalized Black–Scholes Model with Stochastic Interest Rates, Stochastic Strings, and Lévy Jumps," Mathematics, MDPI, vol. 12(1), pages 1-39, December.
    2. Almeida, Thiago Ramos, 2024. "Estimating time-varying factors’ variance in the string-term structure model with stochastic volatility," Research in International Business and Finance, Elsevier, vol. 70(PA).
    3. Bisht Deepak & Laha, A. K., 2017. "Pricing Option on Commodity Futures under String Shock," IIMA Working Papers WP 2017-07-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
    4. Bueno-Guerrero, Alberto & Moreno, Manuel & Navas, Javier F., 2016. "The stochastic string model as a unifying theory of the term structure of interest rates," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 461(C), pages 217-237.
    5. Bueno-Guerrero, Alberto & Moreno, Manuel & Navas, Javier F., 2020. "Valuation of caps and swaptions under a stochastic string model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 559(C).

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