A square root interest rate model fitting discrete initial term structure data
AbstractThis paper presents one-factor and multifactor versions of a term structure model in which the factor dynamics are given by Cox/Ingersoll/Ross (CIR) type 'square root' diffusions with piece wise constant parameters. The model is fitted to initial term structures given by a finite number of data points, interpolating endogenously. Closed form and near closed form solutions for a large class of fixed income derivatives are derived in terms of a compound noncentral chi-square distribution. An implementation of the model is discussed where the initial term structure of volatility is fitted via cap prices.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.
Volume (Year): 7 (2000)
Issue (Month): 3 ()
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Web page: http://www.tandfonline.com/RAMF20
Other versions of this item:
- 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.
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