Approximation of forward curve models in commodity markets with arbitrage-free finite-dimensional models

In this paper, we show how to approximate Heath–Jarrow–Morton dynamics for the forward prices in commodity markets with arbitrage-free models which have a finite-dimensional state space. Moreover, we recover a closed-form representation of the forward price dynamics in the approximation models and derive the rate of convergence to the true dynamics uniformly over an interval of time to maturity under certain additional smoothness conditions. In the Markovian case, we can strengthen the convergence to be uniform over time as well. Our results are based on the construction of a convenient Riesz basis on the state space of the term structure dynamics.

• Publication year

  2015

• Venue

  Finance and Stochastics

• Publication date

  2015-12-18

• Fields of study

  Mathematics, Computer Science, Economics

• Identifiers
  DOI 10.1007/s00780-018-0355-9arXiv 1512.05983
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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