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Approximate Series Solutions Of A One-Factor Term Structure Model For Bond Pricing

Author

Listed:
  • SUNDAY ONOS EDEKI

    (Department of Mathematics, Covenant University, Ota, Nigeria)

  • DEBORAH CHIKWADO OKOLI

    (Department of Mathematics, Covenant University, Ota, Nigeria)

  • HIJAZ AHMAD

    (��Information Technology Application and Research Center, Istanbul Ticaret University, 34445 Istanbul, Turkey‡Department of Mathematics, Faculty of Humanities and Social Sciences, Istanbul Ticaret University, 34445 Istanbul, Turkey)

  • WING-KEUNG WONG

    (�Department of Finance, Fintech & Blockchain Research Center and Big Data Research Center, Asia University, Taiwan¶Department of Medical Research, China Medical University Hospital, China∥Department of Economics and Finance, The Hang Seng University of Hong Kong, P. R. China)

Abstract

One-factor term structure model in finance and economic setups conveys the opinion that there exists only one Brownian process in the formulation of the short rate model as one source of randomness. To extend the theory, in this paper, we develop the approximate solution of a one-factor bond pricing model that can be used to obtain solutions of both nonlinear and multi-factor models and get applications of two proposed solution methods: Elzaki Adomian decomposition method (EADM) and Laplace Adomian decomposition solution method (LADM). We first obtain an efficient, reliable and approximate-analytical solution for a one-factor bond pricing model. We provide illustrative examples that are in good agreement when compared with those already in literature. The methods are very effective in the application being the modified version of the classical Elzaki, and Laplace transforms. Since our proposed methods are effective and efficient, we recommend academics and practitioners apply our proposed model to obtain solutions for some financial models, including both the multi-factor and nonlinear models.

Suggested Citation

  • Sunday Onos Edeki & Deborah Chikwado Okoli & Hijaz Ahmad & Wing-Keung Wong, 2021. "Approximate Series Solutions Of A One-Factor Term Structure Model For Bond Pricing," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 1-22, December.
    • Handle: RePEc:wsi:afexxx:v:16:y:2021:i:04:n:s2010495222500051
    DOI: 10.1142/S2010495222500051
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    Cited by:

    1. Moawia Alghalith & Wing-Keung Wong, 2022. "Option Pricing Under an Abnormal Economy: using the Square Root of the Brownian Motion," Advances in Decision Sciences, Asia University, Taiwan, vol. 26(Special), pages 4-18, December.

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