Bond pricing when the short term interest rate follows a threshold process
AbstractUsing a stochastic discount factor approach, we derive the exact solution for arbitrage-free bond yields for the case that the short-term interest rate follows a threshold process with the intercept switching endogenously. The yield functions, mapping the one-month rate into n-period yields, respectively. This is in contrast to linear short-rate process which imply an affine yield function. The intervals for which convexity or concavity prevails increase with time to maturity. --
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Bibliographic InfoPaper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2006,06.
Date of creation: 2006
Date of revision:
Threshold process; term structure of interest rates; nonlinear yield function;
Other versions of this item:
- Wolfgang Lemke & Theofanis Archontakis, 2008. "Bond pricing when the short-term interest rate follows a threshold process," Quantitative Finance, Taylor & Francis Journals, vol. 8(8), pages 811-822.
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-08-05 (All new papers)
- NEP-FIN-2006-08-05 (Finance)
- NEP-FMK-2006-08-05 (Financial Markets)
- NEP-MAC-2006-08-05 (Macroeconomics)
- NEP-MON-2006-08-05 (Monetary Economics)
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