Interest rate convexity in a Gaussian framework

TL;DR

This paper introduces a Gaussian-driven short rate model and derives explicit formulas for interest rate convexity adjustments, enhancing understanding of interest rate dynamics in a Gaussian framework.

Contribution

It defines a Gaussian Volterra process-based short rate model and provides explicit formulas for convexity adjustments, a novel contribution in interest rate modeling.

Findings

Explicit formulas for convexity adjustments derived

Properties of Gaussian Volterra process-based models analyzed

Enhanced understanding of interest rate convexity in Gaussian frameworks

Abstract

The contributions of this paper are twofold: we define and investigate the properties of a short rate model driven by a general Gaussian Volterra process and, after defining precisely a notion of convexity adjustment, derive explicit formulae for it.