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Term Structure Equations Under Benchmark Framework

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Author Info
El Qalli, Yassine

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Abstract

This paper makes use of an integrated benchmark modeling framework that allows us to derive term structure equations for bond and forward prices. The benchmark or numeraire is chosen to be the growth optimal portfolio (GOP). For deterministic short rate the solution of the bond term structure equation coincides with the explicit formula obtained in Platen(2005). The resulting term structure equations are used to explain moves in bond and forward prices by introducing GOP as a factor and therefore constructing a hedge portfolio for bond consisting of units of the GOP and the saving account. The paper also derives an affine term structure equation for forward price in term of the GOP factor. In the case of stochastic short rate we restrict our selves to give only a term structure equation for the bond price.

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File URL: http://mpra.ub.uni-muenchen.de/15667/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15667.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:15667

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Related research
Keywords: Term structure; Benchmark approach; GOP; Forward price; bond.;

Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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  1. Eckhard Platen, 2001. "Arbitrage in Continuous Complete Markets," Research Paper Series 72, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
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This page was last updated on 2009-12-7.

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