Objective "The term structure of interest rates plays a central role in the functioning of the interbank market. It also represents a key factor for the valuation and management of long term liabilities, such as pensions. The financial crisis has revealed the multivariate risk nature of the term structure, which includes inflation, credit and liquidity risk, resulting in multiple spread adjusted discount curves. This has generated a strong interest in tractable stochastic models for the movements of the term structure that can match all determining risk factors.We propose a new class of term structure models based on polynomial factor processes which are defined as jump-diffusions whose generator leaves the space of polynomials of any fixed degree invariant. The moments of their transition distributions are polynomials in the initial state. The coefficients defining this relationship are given as solutions of a system of nested linear ordinary differential equations. As a consequence polynomial processes yield closed form polynomial-rational expressions for the term structure of interest rates. Polynomial processes include affine processes, whose transition functions admit an exponential-affine characteristic function. Affine processes are among the most widely used models in finance to date, but come along with some severe specification limitations. We propose to overcome these shortcomings by studying polynomial processes and polynomial expansion methods achieving a comparable efficiency as Fourier methods in the affine case.In sum, the objectives of this project are threefold. First, we plan to develop a theory for polynomial processes and entirely explore their statistical properties. This fills a gap in the literature on affine processes in particular. Second, we aim to develop polynomial-rational term structure models addressing the new paradigm of multiple spread adjusted discount curves. Third, we plan to implement and estimate these models using real market data." Fields of science natural sciencesmathematicspure mathematicsmathematical analysisdifferential equations Programme(s) FP7-IDEAS-ERC - Specific programme: "Ideas" implementing the Seventh Framework Programme of the European Community for research, technological development and demonstration activities (2007 to 2013) Topic(s) ERC-SG-PE1 - ERC Starting Grant - Mathematical foundations Call for proposal ERC-2012-StG_20111012 See other projects for this call Funding Scheme ERC-SG - ERC Starting Grant Coordinator ECOLE POLYTECHNIQUE FEDERALE DE LAUSANNE Address Batiment ce 3316 station 1 1015 Lausanne Switzerland See on map Region Schweiz/Suisse/Svizzera Région lémanique Vaud Activity type Higher or Secondary Education Establishments Administrative Contact Caroline Vandevyver (Ms.) Principal investigator Damir Filipovic (Prof.) Links Contact the organisation Opens in new window Website Opens in new window EU contribution No data Beneficiaries (1) Sort alphabetically Sort by EU Contribution Expand all Collapse all ECOLE POLYTECHNIQUE FEDERALE DE LAUSANNE Switzerland EU contribution € 995 155,00 Address Batiment ce 3316 station 1 1015 Lausanne See on map Region Schweiz/Suisse/Svizzera Région lémanique Vaud Activity type Higher or Secondary Education Establishments Administrative Contact Caroline Vandevyver (Ms.) Principal investigator Damir Filipovic (Prof.) Links Contact the organisation Opens in new window Website Opens in new window Other funding No data
