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Term Structure Models with Parallel and Proportional Shifts

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Author Info
Armerin, Frederik () (Department of Mathematics)
Björk, Tomas () (Department of Finance,)
Jensen, Bjarne Astrup () (Department of Finance, Copenhagen Business School)
Abstract

We investigate the possibility of an arbitrage free model for the term structure of interest rates where the yield curve only changes through a parallel shift. We consider HJM type forward rate models driven by a multidimensionalWiener process as well as by a general marked point process. Within this general framework we show that there does indeed exist a large variety of nontrivial parallel shift term structure models, and we also describe these in detail. We also show that there exists no nontrivial flat term structure model. The same analysis is repeated for the similar case, where the yield curve only changes through proportional shifts.

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File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7137
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Publisher Info
Paper provided by Copenhagen Business School, Department of Finance in its series Working Papers with number 2005-5.

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Length: 23 pages
Date of creation: 26 Oct 2005
Date of revision:
Publication status: Published in Applied Mathematical Finance , 2007, pages 243-260.
Handle: RePEc:hhs:cbsfin:2005_005

Note: Forthcoming in Applied Mathematical Finance
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Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
Phone: +45 3815 3815
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Web page: http://www.cbs.dk/departments/finance/
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Related research
Keywords: bond market; term structure of interest rates; flat term structures;

Find related papers by JEL classification:
G00 - Financial Economics - - General - - - General

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Montrucchio, Luigi & Peccati, Lorenzo, 1991. "A note on Shiu--Fisher--Weil immunization theorem," Insurance: Mathematics and Economics, Elsevier, vol. 10(2), pages 125-131, July. [Downloadable!] (restricted)
  2. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January. [Downloadable!] (restricted)
  3. Fisher, Lawrence & Weil, Roman L, 1971. "Coping with the Risk of Interest-Rate Fluctuations: Returns to Bondholders from Naive and Optimal Strategies," Journal of Business, University of Chicago Press, vol. 44(4), pages 408-31, October. [Downloadable!] (restricted)
  4. Ingersoll, Jonathan E. & Skelton, Jeffrey & Weil, Roman L., 1978. "Duration Forty Years Later," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(04), pages 627-650, November. [Downloadable!]
  5. Bent Jesper Christensen & Tomas Björk, . "Interest Rate Dynamics and Consistent Forward Rate Curves," Management Working Papers 1999-4, School of Economics and Management, University of Aarhus. [Downloadable!]
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