A Square-Root Interest Rate Model Fitting Discrete Initial Term Structure Data
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. This 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 derivatives are derived in terms of a compound noncentral chi-square distribution. An implementation of the model is discussed where the initial term structure of volatility is fitted via cap prices.
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|Date of creation:||01 Dec 1999|
|Date of revision:|
|Publication status:||Published as: Schlogl, E. and Schlogl, L., 2000, "A Square Root Interest Rate Model Fitting Discrete Initial Term Structure Data", Applied Mathematical Finance, 7(3), 183-309.|
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