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Quadratic Term Structure Models in Discrete Time

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Abstract

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.

Suggested Citation

  • Marco Realdon, 2006. "Quadratic Term Structure Models in Discrete Time," Discussion Papers 06/01, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:06/01
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    References listed on IDEAS

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    Cited by:

    1. Andreasen, Martin M & Meldrum, Andrew, 2015. "Dynamic term structure models: the best way to enforce the zero lower bound in the United States," Bank of England working papers 550, Bank of England.
    2. repec:eee:finlet:v:21:y:2017:i:c:p:100-106 is not listed on IDEAS
    3. Andreasen, Martin M. & Christensen, Bent Jesper, 2015. "The SR approach: A new estimation procedure for non-linear and non-Gaussian dynamic term structure models," Journal of Econometrics, Elsevier, vol. 184(2), pages 420-451.
    4. Marco Realdon, 2006. "Equity Valuation Under Stochastic Interest Rates," Discussion Papers 06/12, Department of Economics, University of York.
    5. Anh Le & Bruno Feunou & Christian Lundblad & Jean-S├ębastien Fontaine, 2015. "Tractable Term-Structure Models and the Zero Lower Bound," Staff Working Papers 15-46, Bank of Canada.
    6. Andreasen, Martin & Meldrum, Andrew, 2013. "Likelihood inference in non-linear term structure models: the importance of the lower bound," Bank of England working papers 481, Bank of England.
    7. Realdon, Marco, 2016. "Tests of non linear Gaussian term structure models," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 44(C), pages 128-147.

    More about this item

    Keywords

    Quadratic term structure model; discrete time; bond valuation; recursive solution; bond option;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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