Monotonicity of the collateralized debt obligations term structure model

Abstract

The problem of existence of arbitrage-free and monotone collateralized debt obligations term structure models is studied. Conditions for positivity and monotonicity of the corresponding Heath–Jarrow–Morton–Musiela equation for the -forward rates with the use of the Milian-type result are formulated. Two state spaces are taken into account – of square integrable functions and a Sobolev space. For the first the regularity results concerning pointwise monotonicity are proven. Arbitrage-free and monotone models are characterized in terms of the volatility of the model and characteristics of the driving Lévy process.