On the accuracy of the local linear approximation for the term structure of interest rates
AbstractWe examine by numerical experiments the accuracy of an analytical approximation for the nonlinear term structure of interest rates, which is obtained by applying the local linear approximation to a generally specified process of the short rate. Under various short-rate models, we compare discount-bond prices computed by the approximation with those calculated by the Monte Carlo method as the benchmark, which shows that deviations are small. Also in this paper, we show that the approximation originally derived in single-factor framework can be easily extended to a multifactor counterpart. We examine the accuracy using an illustrative two-factor model, which also shows the approximation is accurate.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Quantitative Finance.
Volume (Year): 4 (2004)
Issue (Month): 2 ()
Contact details of provider:
Web page: http://www.tandfonline.com/RQUF20
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Takamizawa, Hideyuki & Shoji, Isao, 2009.
"Modeling the term structure of interest rates with general diffusion processes: A moment approximation approach,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 33(1), pages 65-77, January.
- Takamizawa, Hideyuki & Shoji, Isao, 2007. "Modeling the Term Structure of Interest Rates with General Diffusion Processes: A Moment Approximation Approach," Discussion Papers 2006-05, Graduate School of Economics, Hitotsubashi University.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.