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A simple class of square-root interest-rate models

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  • F. Jamshidian
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    Abstract

    An analytically tractable class of square-root interest-rate models is introduced. Algebraic expressions are found for the drift and volatility parameters of the short rate in terms of initial yield and volatility curves. Explicit formulae are derived for bond, Arrow-Debreu, and European and American bond options.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/13504869500000004
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 2 (1995)
    Issue (Month): 1 ()
    Pages: 61-72

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    Handle: RePEc:taf:apmtfi:v:2:y:1995:i:1:p:61-72

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    Web page: http://www.tandfonline.com/RAMF20

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    Related research

    Keywords: square-root process; chi-squared distribution; Riccati equation; yield curve; volatility curve; bond option;

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    Cited by:
    1. Ben-Ameur, Hatem & Breton, Michele & Karoui, Lotfi & L'Ecuyer, Pierre, 2007. "A dynamic programming approach for pricing options embedded in bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2212-2233, July.
    2. Erik Schlögl & L. Schlögl, 1999. "A Square-Root Interest Rate Model Fitting Discrete Initial Term Structure Data," Research Paper Series 24, Quantitative Finance Research Centre, University of Technology, Sydney.
    3. Dahl, Mikkel & Moller, Thomas, 2006. "Valuation and hedging of life insurance liabilities with systematic mortality risk," Insurance: Mathematics and Economics, Elsevier, vol. 39(2), pages 193-217, October.
    4. Schloegl, Erik & Lutz Schloegl, 1997. "A Tractable Term Structure Model with Endogenous Interpolation and Positive Interest Rates," Discussion Paper Serie B 396, University of Bonn, Germany.
    5. Rogers, L. C. G. & Stummer, Wolfgang, 2000. "Consistent fitting of one-factor models to interest rate data," Insurance: Mathematics and Economics, Elsevier, vol. 27(1), pages 45-63, August.
    6. Mercurio, F. & Moraleda, J. M., 2000. "An analytically tractable interest rate model with humped volatility," European Journal of Operational Research, Elsevier, vol. 120(1), pages 205-214, January.
    7. Kimmel, Robert L., 2004. "Modeling the term structure of interest rates: A new approach," Journal of Financial Economics, Elsevier, vol. 72(1), pages 143-183, April.

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