Term Structure Equations Under Benchmark Framework
This paper makes use of an integrated benchmark modeling framework that allows us to derive term structure equations for bond and forward prices. The benchmark or numeraire is chosen to be the growth optimal portfolio (GOP). For deterministic short rate the solution of the bond term structure equation coincides with the explicit formula obtained in Platen(2005). The resulting term structure equations are used to explain moves in bond and forward prices by introducing GOP as a factor and therefore constructing a hedge portfolio for bond consisting of units of the GOP and the saving account. The paper also derives an affine term structure equation for forward price in term of the GOP factor. In the case of stochastic short rate we restrict our selves to give only a term structure equation for the bond price.
|Date of creation:||08 2009|
|Date of revision:|
|Contact details of provider:|| Postal: Avenue de Beaulieu, 1160 Brussels|
Phone: +322 299 3523
Fax: +322 299 3523
Web page: http://www.eeri.eu/index.htm
More information through EDIRC
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.:
- Eckhard Platen, 2003.
"An Alternative Interest Rate Term Structure Model,"
Research Paper Series
97, Quantitative Finance Research Centre, University of Technology, Sydney.
- Eckhard Platen, 2005. "An Alternative Interest Rate Term Structure Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(06), pages 717-735.
- Eckhard Platen, 2001. "Arbitrage in Continuous Complete Markets," Research Paper Series 72, Quantitative Finance Research Centre, University of Technology, Sydney.
When requesting a correction, please mention this item's handle: RePEc:eei:rpaper:eeri_rp_2009_13. 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: (Julia van Hove)
If references are entirely missing, you can add them using this form.