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Abstract: We construct default-free interest rate models in the spirit of thewell-known Markov funcional models: our focus is analytic tractability of themodels and generality of the approach. We work in the setting of state pricedensities and construct models by means of the so called propagation property.The propagation property can be found implicitly in all of the popular stateprice density approaches, in particular heat kernels share the propagationproperty wherefrom we deduced the name of the approach. As a related matter,an interesting property of heat kernels is presented, too.



Author: Jiro Akahori, Yuji Hishida, Josef Teichmann, Takahiro Tsuchiya

Source: https://arxiv.org/



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