Solvable affine term structure models

Abstract

An Affine Term Structure Model (ATSM) is said to be solvable if the pricing problem has an explicit solution, i.e., the corresponding Riccati ordinary differential equations have a regular globally integrable flow. We identify the parametric restrictions which are necessary and sufficient for an ATSM with continuous paths, to be solvable in a state space, where, the domain of positive factors, has the geometry of a symmetric cone. This class of state spaces includes as special cases those introduced by Duffie and Kan (1996), and Wishart term structure processes discussed by Gourieroux and Sufana (2003). For all solvable models we provide the procedure to find the explicit solution of the Riccati ODE. © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Inc.