Applied Mathematics and Optimization, Vol.68, No.1, 21-41, 2013
Kernel-Correlated L,vy Field Driven Forward Rate and Application to Derivative Pricing
We propose a term structure of forward rates driven by a kernel-correlated L,vy random field under the HJM framework. The kernel-correlated L,vy random field is composed of a kernel-correlated Gaussian random field and a centered Poisson random measure. We shall give a criterion to preclude arbitrage under the risk-neutral pricing measure. As applications, an interest rate derivative with general payoff functional is priced under this pricing measure.