Faster solutions for Black zero lower bound term structure models
The Black framework offers a theoretically appealing way to model the term structure and gauge the stance of monetary policy when the zero lower bound of interest rates becomes constraining, but it is time consuming to apply using standard numerical methods. I outline a faster Monte Carlo simulation method for Black implementions, illustrate its performance for a one factor model, and then discuss the ready extension to models with multiple factors.
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- Black, Fischer, 1995. " Interest Rates as Options," Journal of Finance, American Finance Association, vol. 50(5), pages 1371-76, December.
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- Michael D. Bauer & Glenn D. Rudebusch, 2013. "Monetary policy expectations at the zero lower bound," Working Paper Series 2013-18, Federal Reserve Bank of San Francisco.
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