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.
read more
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.
read more
Chat with Paper
AI Agents for this Paper
Find similar papers on Google Scholar, PubMed and Arxiv
Write a critical review of this paper
Analyze citations of this paper to find unaddressed research gaps
Citations
•Posted Content
Switching VARMA Term Structure Models - Extended Version
Alain Monfort,Fulvio Pegoraro +1 more
TL;DR: In this paper, a global discrete-time modeling of the term structure of interest rates is proposed to capture simultaneously the following important features : (i) an historical dynamics of the factor driving term structure shapes involving several lagged values, and switching regimes; (ii) a specification of the stochastic discount factor with time-varying and regime dependent risk-premia; (iii) explicit or quasi explicit formulas for zero-coupon bond and interest rate derivative prices; (iv) the positivity of the yields at each maturity.
Optimal consumption and investment strategies in dynamic stochastic economies
Carsten Sørensen,Claus Munk +1 more
- 01 Jan 2007
TL;DR: In this article, Steensen et al. presented a paper on stochastic economic dynamics at the Stochastic Economic Dynamics Conference in Elsinore and the workshop on Stochastics for Risk,Insurance and Finance at London School of Economics.
18
Approximating volatility diffusions with cev-arch models
Fabio Fornari,Antonio Mele +1 more
TL;DR: In this paper, a new model of the ARCH class, which allows volatility to react nonlinearly to past shocks as a function of the past volatility level, is proposed.
18
Volatility in Discrete and Continuous-Time Models: A Survey with New Evidence on Large and Small Jumps
Diep Duong,Norman R. Swanson +1 more
TL;DR: In this paper, the authors discuss important developments in volatility models, with focus on time-varying and stochastic volatility as well as nonparametric volatility estimation, and provide empirical evidence on small and large jumps from the perspective of their contribution to overall realized variation, using high-frequency price return data on 25 stocks in the DOW 30.
The surprise element: jumps in interest rate diffusions
Sanjiv Ranjan Das
- 01 Jan 1999
TL;DR: Das et al. as discussed by the authors developed a class of jump-di-usion models of the short rate to capture surprise effects, and showed that these models oer a good statistical distribution of short rate behavior, and are useful in understanding many empirical phenomena.
18
References
The Pricing of Options and Corporate Liabilities
Fischer Black,Myron S. Scholes +1 more
TL;DR: In this paper, a theoretical valuation formula for options is derived, based on the assumption that options are correctly priced in the market and it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks.
31.9K
A Theory of the Term Structure of Interest Rates.
TL;DR: In this paper, the authors use an intertemporal general equilibrium asset pricing model to study the term structure of interest rates and find that anticipations, risk aversion, investment alternatives, and preferences about the timing of consumption all play a role in determining bond prices.
8.5K
An equilibrium characterization of the term structure
TL;DR: In this article, the authors derived a general form of the term structure of interest rates and showed that the expected rate of return on any bond in excess of the spot rate is proportional to its standard deviation.
6.9K