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Bayesian binomial zero-coupon bonds model

Author

Listed:
  • Bogomolov, Rostislav

    (Central Economics and Mathematics Institute, Moscow, Russian Federation)

  • Khametov, Vladimir

    (National Research University Higher School of Economics, Moscow, Russian Federation)

Abstract

The article is devoted to construction of stochastic one-factor evolutional model for zero-coupon bond in discrete time. As the base sequence it was used an asymmetric geometric random walk. It is shown that in case of observing not only the previous values of wandering, but his condition the last time it is Markov. In this case derived formulas for the transition probability in one step, as well as for the conditional mean and variance. Based on these facts, the article describes a stochastic model of zero-coupon bonds. For this model of bond were also find explicit formulas of its volatility, risk-neutral price, temporal structure of interest rates. Results of simulation display good match with real data.

Suggested Citation

  • Bogomolov, Rostislav & Khametov, Vladimir, 2016. "Bayesian binomial zero-coupon bonds model," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 42, pages 100-120.
  • Handle: RePEc:ris:apltrx:0293
    as

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    References listed on IDEAS

    as
    1. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    2. Ho, Thomas S Y & Lee, Sang-bin, 1986. "Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-1029, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    zero-coupon bond model; geometric random walk; interest rate; yield; model calibration;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General

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