Author(s)

Gang Wang^1,2

¹School of Finance, Shanghai University of Finance and Economics, Shanghai, China.
²Shanghai Key Laboratory of Financial Information Technology, Shanghai, China.

This paper analyzes a simple discrete-time affine multifactor model of the term structure of interest rates in which the pricing factors that follow a Gaussian first-order vector autoregression are observable and there are no possibilities for risk-free arbitrage. We present the theoretical results for the compatible risk-neutral dynamics of observable factors in a maximally flexible way consistent with no-arbitrage under the assumption that the factor loadings of some yields are specified exogenously.

GDTSMs, Observable Factors, No-Arbitrage

Wang, G. (2015) Arbitrage-Free Gaussian Affine Term Structure Model with Observable Factors. Journal of Mathematical Finance, 5, 142-152. doi: 10.4236/jmf.2015.52013.