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Bond pricing when the short term interest rate follows a threshold process

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Author Info
Lemke, Wolfgang
Archontakis, Theofanis

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Abstract

Using 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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Publisher Info
Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2006,06.

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Date of creation: 2006
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Handle: RePEc:zbw:bubdp1:4243

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Related research
Keywords: Threshold process; term structure of interest rates; nonlinear yield function;

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Find related papers by JEL classification:
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates

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This page was last updated on 2009-12-30.

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