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A Nonlinear Non-probabilistic Spot Interest Rate Model


  • David Epstein
  • Paul Wilmott


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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