AFFINE REALIZATIONS FOR LÉVY DRIVEN INTEREST RATE MODELS WITH REAL-WORLD FORWARD RATE DYNAMICS

Abstract. We investigate the existence of affine realizations for interest rate term structure models driven by Lévy processes. Using as numéraire the growth optimal portfolio, we model the interest rate term structure under the real-world probability measure, and hence, we do not need the existence of an equivalent risk-neutral probability measure. Furthermore, we include finite di-mensional external factors, thus admitting a stochastic volatility structure. Key Words: Lévy driven interest rate models, real-world forward rate dynamics, stochastic volatility, affine realizations. 91B28, 60H15 1