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Approximate formulae for pricing zero-coupon bonds and their asymptotic analysis

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  • Beata Stehlikova
  • Daniel Sevcovic

Abstract

We 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.

Suggested Citation

  • Beata Stehlikova & Daniel Sevcovic, 2008. "Approximate formulae for pricing zero-coupon bonds and their asymptotic analysis," Papers 0802.3039, arXiv.org, revised Jul 2008.
    • Handle: RePEc:arx:papers:0802.3039
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    References listed on IDEAS

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    1. 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, March.
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