Makhankov, V. G. and AgueroGranados, M. A. (2009): MeanReverting Stochastic Processes, Evaluation of Forward Prices and Interest Rates.

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Abstract
We consider meanreverting stochastic processes and build selfconsistent models for forward price dynamics and some applications in power industries. These models are built using the ideas and equations of stochastic differential geometry in order to close the system of equations for the forward prices and their volatility. Some analytical solutions are presented in the one factor case and for specific regular forward price/interest rates volatility. Those models will also play a role of initial conditions for a stochastic process describing forward price and interest rates volatility. Subsequently, the curved manifold of the internal space i.e. a discrete version of the bond term space (the space of bond maturing) is constructed. The dynamics of the point of this internal space that correspond to a portfolio of different bonds is studied. The analysis of the discount bond forward rate dynamics, for which we employed the Stratonovich approach, permitted us to calculate analytically the regular and the stochastic volatilities. We compare our results with those known from the literature.
Item Type:  MPRA Paper 

Original Title:  MeanReverting Stochastic Processes, Evaluation of Forward Prices and Interest Rates 
Language:  English 
Keywords:  : Stochastic Differential Geometry, MeanReverting Stochastic Processes and Term Structure of Specific (Some) Economic/Finance Instruments 
Subjects:  A  General Economics and Teaching > A1  General Economics > A12  Relation of Economics to Other Disciplines C  Mathematical and Quantitative Methods > C0  General > C02  Mathematical Methods C  Mathematical and Quantitative Methods > C2  Single Equation Models; Single Variables > C23  Models with Panel Data; Longitudinal Data; Spatial Time Series C  Mathematical and Quantitative Methods > C6  Mathematical Methods; Programming Models; Mathematical and Simulation Modeling > C62  Existence and Stability Conditions of Equilibrium 
Item ID:  18750 
Depositing User:  Maximo Aguero 
Date Deposited:  20. Nov 2009 05:35 
Last Modified:  14. Feb 2013 07:33 
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URI:  http://mpra.ub.unimuenchen.de/id/eprint/18750 