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A square root interest rate model fitting discrete initial term structure data

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  • Erik Schlogl
  • Lutz Schlogl

Abstract

This 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.

Suggested Citation

  • Erik Schlogl & Lutz Schlogl, 2000. "A square root interest rate model fitting discrete initial term structure data," Applied Mathematical Finance, Taylor & Francis Journals, vol. 7(3), pages 183-209.
    • Handle: RePEc:taf:apmtfi:v:7:y:2000:i:3:p:183-209
    DOI: 10.1080/13504860110034770
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Samson Assefa, 2007. "Pricing Swaptions and Credit Default Swaptions in the Quadratic Gaussian Factor Model," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 31, July-Dece.
    2. Mesias Alfeus, 2019. "Stochastic Modelling of New Phenomena in Financial Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2019.
    3. Yang Chang, 2014. "A Consistent Approach to Modelling the Interest Rate Market Anomalies Post the Global Financial Crisis," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 18, July-Dece.
    4. Yang Chang, 2014. "A Consistent Approach to Modelling the Interest Rate Market Anomalies Post the Global Financial Crisis," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2014.
    5. Yang Chang & Erik Schlogl, 2014. "A Consistent Framework for Modelling Basis Spreads in Tenor Swaps," Research Paper Series 348, Quantitative Finance Research Centre, University of Technology, Sydney.
    6. Samson Assefa, 2007. "Pricing Swaptions and Credit Default Swaptions in the Quadratic Gaussian Factor Model," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 3-2007.
    7. Areski Cousin & Ibrahima Niang, 2014. "On the Range of Admissible Term-Structures," Working Papers hal-00968943, HAL.
    8. Hans-Peter Bermin, 2012. "Bonds and Options in Exponentially Affine Bond Models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 19(6), pages 513-534, December.
    9. Gabriel G. Drimus, 2012. "Options on realized variance by transform methods: a non-affine stochastic volatility model," Quantitative Finance, Taylor & Francis Journals, vol. 12(11), pages 1679-1694, November.
    10. Lin-Yee Hin & Nikolai Dokuchaev, 2016. "Short Rate Forecasting Based On The Inference From The Cir Model For Multiple Yield Curve Dynamics," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 1-33, March.

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