A yield-factor model of interest rates
Darrell Duffie,Rui Kan +1 more
TL;DR: In this article, the authors present a consistent and arbitrage-free multifactor model of the term structure of interest rates in which yields at selected fixed maturities follow a parametric muitivariate Markov diffusion process with stochastic volatility.
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Abstract: This paper presents a consistent and arbitrage-free multifactor model of the term structure of interest rates in which yields at selected fixed maturities follow a parametric muitivariate Markov diffusion process with “stochastic volatility.” the yield of any zero-coupon bond is taken to be a maturity-dependent affine combination of the selected “basis” set of yields. We provide necessary and sufficient conditions on the stochastic model for this affine representation. We include numerical techniques for solving the model, as well as numerical techniques for calculating the prices of term-structure derivative prices. the case of jump diffusions is also considered.
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Citations
Core and 'Crust': Consumer Prices and the Term Structure of Interest Rates ∗
TL;DR: The authors proposed a model for nominal and real term structures of interest rates that includes dynamics for the three main components of total inflation: core, food, and energy, which combines together to produce a measure of expected total inflation that investors use to price nominal Treasuries.
Risk Premia and Volatilities in a Nonlinear Term Structure Model
TL;DR: In this article, a reduced-form term structure model with closed-form solutions for yields where the short rate and market prices of risk are nonlinear functions of Gaussian state variables was introduced.
Can we Exploit Predictability in Bond Markets
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Asset and liability management handbook
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TL;DR: The ALM model has been used extensively in the area of asset-liability management for a long time as mentioned in this paper, including in the context of defined-benefit plans (DBP).
Humps in the volatility structure of the crude oil futures market: New evidence
TL;DR: In this article, the authors analyzed the volatility structure of commodity derivatives markets and found the presence of hump-shaped, partially spanned stochastic volatility in the crude oil market.
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