Conditional Gaussian models of the term structure of interest rates
AbstractWe present a new family of yield curve models, termed "Conditional Gaussian". It provides both simplicity and extreme flexibility in constructing "market models". Almost any conditional co-variance structure - including features designed to capture volatility "skews" and/or dependence on past returns - can be used, and the model can be embedded into a continuous-time whole yield curve model consistent with general equilibrium. Conditionally Gaussian increments in log one-plus-interest-rates enable "vanilla" and path-dependent derivatives to be valued easily by Monte Carlo, whether or not their payoffs depend solely on the particular market rates being modelled directly.
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Bibliographic InfoArticle provided by Springer in its journal Finance and Stochastics.
Volume (Year): 6 (2002)
Issue (Month): 3 ()
Note: received: June 1999; final version received: September 2001
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Web page: http://www.springerlink.com/content/101164/
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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- Serafín Frache & Gabriel Katz, 2004. "Estimating a Risky Term Structure of Uruguayan Sovereign Bonds," Documentos de Trabajo (working papers) 0304, Department of Economics - dECON.
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