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A Nonlinear Non-probabilistic Spot Interest Rate Model

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  • David Epstein
  • Paul Wilmott
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    Abstract

    We show how to use 'uncertainty' in place of the more traditional Brownian 'randomness' to model a short-term interest rate. The advantage of this model is principally that it is difficult to show statistically that it is wrong. Whether the model is useful for pricing fixed-income products is less clear. We discuss the pros and cons of the model, showing how to price and hedge various contracts, saying which are easy and which are hard.

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    Bibliographic Info

    Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 1999mf21.

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    Date of creation: 1999
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    Handle: RePEc:sbs:wpsefe:1999mf21

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    Web page: http://www.finance.ox.ac.uk
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