A Square-Root Interest Rate Model Fitting Discrete Initial Term Structure Data
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. This 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 derivatives are derived in terms of a compound noncentral chi-square distribution. An implementation of the model is discussed where the initial term structure of volatility is fitted via cap prices.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 24.
Date of creation: 01 Dec 1999
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Other versions of this item:
- Erik Schlogl & Lutz Schlogl, 2000. "A square root interest rate model fitting discrete initial term structure data," Applied Mathematical Finance, Taylor and Francis Journals, vol. 7(3), pages 183-209.
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