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Quadratic Term Structure Models in Discrete Time

  • Marco Realdon

This paper extends the results on quadratic term structure models in continuos time to the discrete time setting. The continuos time setting can be seen as a special case of the discrete time one. Recursive closed form solutions for zero coupon bonds are provided even in the presence of multiple correlated underlying factors. Pricing bond options requires simple integration. Model parameters may well be time dependent without scuppering such tractability. Model estimation does not require a restrictive choice of the market price of risk. The model can also be used for pricing credit risk and is particularly useful when the factors are or depend on periodically released macroeconomic data or corporate financial reports.

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File URL: http://www.york.ac.uk/media/economics/documents/discussionpapers/2006/0601.pdf
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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 06/01.

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Date of creation: Jan 2006
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Handle: RePEc:yor:yorken:06/01
Contact details of provider: Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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Web page: http://www.york.ac.uk/economics/
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