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A Simple Model of the Nominal Term Structure of Interest Rates

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  • Yougsoo Choi

    (Department of Mathematics, Hankuk University of Foreign Studies, Korea)

  • Tony S. Wirjanto

    (Department of Economics, University of Waterloo)

Abstract

This paper presents a simple two-factor model of nominal term structure of interest rates, in which the log-price kernel has an autoregressive drift process and a nonlinear GARCH volatility process. With these two state-variable processes, closed-form solutions are derived for zero-coupon bond prices as well as yield to maturity for a given time to maturity.

Suggested Citation

  • Yougsoo Choi & Tony S. Wirjanto, 2008. "A Simple Model of the Nominal Term Structure of Interest Rates," Working Papers 08011, University of Waterloo, Department of Economics.
    • Handle: RePEc:wat:wpaper:08011
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    References listed on IDEAS

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    13. Choi, Youngsoo & Wirjanto, Tony S., 2007. "An analytic approximation formula for pricing zero-coupon bonds," Finance Research Letters, Elsevier, vol. 4(2), pages 116-126, June.
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