A Tractable Term Structure Model with Endogenous Interpolation and Positive Interest Rates
AbstractThis paper presents the one- and the multifactor versions of a term structure model in which the factor dynamics are given by Cox/Ingersoll/Ross (CIR) type "square root" diffusions with piecewise constant parameters. The model is fitted to initial term structures given by a finite number of data points, interpolating endogenously. Closed form and near-closed form solutions for a large class of fixed income contingent claims are derived in terms of a noncentral chi-square distribution whose noncentrality parameter is in turn noncentral chi-square distributed. Implementation details on this distribution are given in the appendix.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 396.
Date of creation: Nov 1997
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term structure of interest rates; fixed income derivatives; square root process; chi-square distribution;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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