IDEAS home Printed from
   My bibliography  Save this article

On the accuracy of the local linear approximation for the term structure of interest rates


  • Hideyuki Takamizawa
  • Isao Shoji


We examine by numerical experiments the accuracy of an analytical approximation for the nonlinear term structure of interest rates, which is obtained by applying the local linear approximation to a generally specified process of the short rate. Under various short-rate models, we compare discount-bond prices computed by the approximation with those calculated by the Monte Carlo method as the benchmark, which shows that deviations are small. Also in this paper, we show that the approximation originally derived in single-factor framework can be easily extended to a multifactor counterpart. We examine the accuracy using an illustrative two-factor model, which also shows the approximation is accurate.

Suggested Citation

  • Hideyuki Takamizawa & Isao Shoji, 2004. "On the accuracy of the local linear approximation for the term structure of interest rates," Quantitative Finance, Taylor & Francis Journals, vol. 4(2), pages 151-157.
  • Handle: RePEc:taf:quantf:v:4:y:2004:i:2:p:151-157
    DOI: 10.1080/14697680400000019

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Takamizawa, Hideyuki & Shoji, Isao, 2009. "Modeling the term structure of interest rates with general diffusion processes: A moment approximation approach," Journal of Economic Dynamics and Control, Elsevier, vol. 33(1), pages 65-77, January.

    More about this item


    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:taf:quantf:v:4:y:2004:i:2:p:151-157. 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: (Chris Longhurst). 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.