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Continuous and Discrete Time Modeling of Short-Term Interest Rates

In: Financial Econometrics Modeling: Derivatives Pricing, Hedge Funds and Term Structure Models

Author

Listed:
  • Chih-Ying Hsiao
  • Willi Semmler

Abstract

In modern finance theory, the short-term interest rate is important in characterizing the term structure of interest rates and in pricing interest-rate-contingent-claims. There is some pioneering work in the continuous-time framework, for example by Vasicek (1997) and Cox et al. (1985). A survey of is provided by Chan et al. (1992). Chan et al. (1992) show that a wide variety of well-known one-factor models for short rates can be nested within the following stochastic different equation (SDE): (9.1) d X t = ( c − β X t ) d t + σ X t γ d W t . $$d{{X}_{t}}=\left( {c-\beta {{X}_{t}}} \right)dt+\sigma X_{t}^{\gamma }d{{W}_{t}}.$$

Suggested Citation

  • Chih-Ying Hsiao & Willi Semmler, 2011. "Continuous and Discrete Time Modeling of Short-Term Interest Rates," Palgrave Macmillan Books, in: Greg N. Gregoriou & Razvan Pascalau (ed.), Financial Econometrics Modeling: Derivatives Pricing, Hedge Funds and Term Structure Models, chapter 9, pages 163-187, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-29520-9_9
    DOI: 10.1057/9780230295209_9
    as

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