IDEAS home Printed from
   My bibliography  Save this article

Random step functions model for interest rates


  • Eleanor Virag

    () (Department of Mathematics and Statistics, University of Melbourne, Melbourne, Victoria 3010, Australia)

  • Fima C. Klebaner

    () (Department of Mathematics and Statistics, University of Melbourne, Melbourne, Victoria 3010, Australia)

  • Konstantin Borovkov

    () (Department of Mathematics and Statistics, University of Melbourne, Melbourne, Victoria 3010, Australia)


We propose a new model for pricing of bonds and their options based on the short rate when the latter exhibits a step function like behaviour. The model produces realistic looking spot rate curves, and allows one to derive explicit formulae for the yield curve and put and cap options. This model is appropriate for markets with pegged rates, such as the Australian market. We also give a general result on bond prices when the short rate is a sum of independent processes.

Suggested Citation

  • Eleanor Virag & Fima C. Klebaner & Konstantin Borovkov, 2003. "Random step functions model for interest rates," Finance and Stochastics, Springer, vol. 7(1), pages 123-143.
  • Handle: RePEc:spr:finsto:v:7:y:2003:i:1:p:123-143
    Note: received: July 2001; final version received: April 2002

    Download full text from publisher

    File URL:
    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 search for a different version of it.

    More about this item


    Interest rates models; Markov point processes; jump processes; bonds; options on bonds;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing


    Access and download statistics


    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:7:y:2003:i:1:p:123-143. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.