Random step functions model for interest rates
AbstractWe propose a new model for pricing of bonds and their options based on the short rate when the latter exhibits a step function like behaviour. The model produces realistic looking spot rate curves, and allows one to derive explicit formulae for the yield curve and put and cap options. This model is appropriate for markets with pegged rates, such as the Australian market. We also give a general result on bond prices when the short rate is a sum of independent processes.
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Bibliographic InfoArticle provided by Springer in its journal Finance and Stochastics.
Volume (Year): 7 (2003)
Issue (Month): 1 ()
Note: received: July 2001; final version received: April 2002
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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
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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