Approximate formulae for pricing zero-coupon bonds and their asymptotic analysis
AbstractWe analyze analytic approximation formulae for pricing zero-coupon bonds in the case when the short-term interest rate is driven by a one-factor mean-reverting process with a volatility nonlinearly depending on the interest rate itself. We derive the order of accuracy of the analytical approximation due to Choi and Wirjanto. We furthermore give an explicit formula for a higher order approximation and we test both approximations numerically for a class of one-factor interest rate models.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 0802.3039.
Date of creation: Feb 2008
Date of revision: Jul 2008
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-09-26 (All new papers)
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- Sirimon Treepongkaruna & Stephen Gray, 2003. "On the robustness of short-term interest rate models," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 43(1), pages 87-121.
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