The Wishart short rate model

TL;DR

This paper introduces a short rate model driven by positive semidefinite matrix processes, capable of replicating various yield curve shapes such as normal, inverse, or humped, under specific conditions.

Contribution

It presents a novel matrix-based short rate model with derived conditions for different yield curve shapes, expanding the modeling tools for interest rate dynamics.

Findings

Model can produce normal, inverse, and humped yield curves

Derived sufficient conditions for yield curve shapes

Extends short rate modeling to matrix-valued stochastic processes

Abstract

We consider a short rate model, driven by a stochastic process on the cone of positive semidefinite matrices. We derive sufficient conditions ensuring that the model replicates normal, inverse or humped yield curves.