Negative volatility for a 2-dimensional square root SDE

Peter Spreij; Enno Veerman

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arXiv · 0807.1224

Negative volatility for a 2-dimensional square root SDE

Peter Spreij·Enno Veerman

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Abstract

In affine term structure models the short rate is modelled as an affine transformation of a multi-dimensional square root process. Sufficient conditions to avoid negative volatility factors are the multivariate Feller conditions. We will prove their necessity for a 2-dimensional square root SDE with one volatility factor by presenting a methodology based on measure transformations and solving linear systems of ordinary differential equations.

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Peter Spreij, Enno Veerman. 2008-11-25. Negative volatility for a 2-dimensional square root SDE. https://arxiv.org/abs/0807.1224

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