IDEAS home Printed from https://ideas.repec.org/a/spr/finsto/v5y2001i3p369-387.html

A deterministic-shift extension of analytically-tractable and time-homogeneous short-rate models

Author

Listed:
  • Damiano Brigo

    (Product and Business Development Group, Banca IMI, SanPaolo IMI Group, Corso Matteotti 6, 20121 Milano, Italy Manuscript)

  • Fabio Mercurio

    (Product and Business Development Group, Banca IMI, SanPaolo IMI Group, Corso Matteotti 6, 20121 Milano, Italy Manuscript)

Abstract

In the present paper we show how to extend any time-homogeneous short-rate model to a model that can reproduce any observed yield curve, through a procedure that preserves the possible analytical tractability of the original model. In the case of the Vasicek (1977) model, our extension is equivalent to that of Hull and White (1990), whereas in the case of the Cox-Ingersoll-Ross (1985) (CIR) model, our extension is more analytically tractable and avoids problems concerning the use of numerical solutions. We also consider the extension of time-homogeneous models without analytical formulas. We then explain why the CIR model is the most interesting model to be extended through our procedure, analyzing it in detail. We also consider an example of calibration to the cap market for two of the presented models. We finally hint at the same extension for multifactor models and explain its advantages for applications.

Suggested Citation

  • Damiano Brigo & Fabio Mercurio, 2001. "A deterministic-shift extension of analytically-tractable and time-homogeneous short-rate models," Finance and Stochastics, Springer, vol. 5(3), pages 369-387.
    • Handle: RePEc:spr:finsto:v:5:y:2001:i:3:p:369-387
    Note: received: October 1998; final version received: August 2000
    as

    Download full text from publisher

    File URL: http://link.springer.de/link/service/journals/00780/papers/1005003/10050369.pdf
    Download Restriction: Access to the full text of the articles in this series is restricted
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Lists

    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. Cox–Ingersoll–Ross model in Wikipedia English
    2. مدل کاکس-اینگرسول-راس in Wikipedia Persian

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:finsto:v:5:y:2001:i:3:p:369-387. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.