A Tractable Term Structure Model with Endogenous Interpolation and Positive Interest Rates
This paper presents the one- and the multifactor versions of a term structure model in which the factor dynamics are given by Cox/Ingersoll/Ross (CIR) type "square root" diffusions with piecewise constant parameters. The model is fitted to initial term structures given by a finite number of data points, interpolating endogenously. Closed form and near-closed form solutions for a large class of fixed income contingent claims are derived in terms of a noncentral chi-square distribution whose noncentrality parameter is in turn noncentral chi-square distributed. Implementation details on this distribution are given in the appendix.
|Date of creation:||Nov 1997|
|Date of revision:|
|Contact details of provider:|| Postal: |
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-92.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 379-406.
- Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
- F. Jamshidian, 1995. "A simple class of square-root interest-rate models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 2(1), pages 61-72.
When requesting a correction, please mention this item's handle: RePEc:bon:bonsfb:396. 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: (BGSE Office)
If references are entirely missing, you can add them using this form.