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A Nonlinear Non-probabilistic Spot Interest Rate Model

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  • David Epstein
  • Paul Wilmott

Abstract

We show how to use 'uncertainty' in place of the more traditional Brownian 'randomness' to model a short-term interest rate. The advantage of this model is principally that it is difficult to show statistically that it is wrong. Whether the model is useful for pricing fixed-income products is less clear. We discuss the pros and cons of the model, showing how to price and hedge various contracts, saying which are easy and which are hard.

Suggested Citation

  • David Epstein & Paul Wilmott, 1999. "A Nonlinear Non-probabilistic Spot Interest Rate Model," OFRC Working Papers Series 1999mf21, Oxford Financial Research Centre.
    • Handle: RePEc:sbs:wpsefe:1999mf21
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    File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/1999mf21.pdf
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    Cited by:

    1. Hölzermann, Julian, 2020. "Pricing Interest Rate Derivatives under Volatility Uncertainty," Center for Mathematical Economics Working Papers 633, Center for Mathematical Economics, Bielefeld University.
    2. Julian Holzermann, 2018. "The Hull-White Model under Volatility Uncertainty," Papers 1808.03463, arXiv.org, revised Jan 2021.
    3. Julian Holzermann, 2020. "Pricing Interest Rate Derivatives under Volatility Uncertainty," Papers 2003.04606, arXiv.org, revised Nov 2021.
    4. Hölzermann, Julian, 2018. "Bond Pricing under Knightian Uncertainty. A Short Rate Model with Drift and Volatility Uncertainty," Center for Mathematical Economics Working Papers 582, Center for Mathematical Economics, Bielefeld University.

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