Article1995

A simple class of square-root interest-rate models

57 citations0/0 files storedApplied Mathematical Finance

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Stochastic processes and financial applications Financial Markets and Investment Strategies Economic theories and models

Abstract

An analytically tractable class of square-root interest-rate models is introduced. Algebraic expressions are found for the drift and volatility parameters of the short rate in terms of initial yield and volatility curves. Explicit formulae are derived for bond, Arrow-Debreu, and European and American bond options.

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References

1985A Theory of the Term Structure of Interest Rates 1976Stochastic Differential Equations and Applications 1992Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model 1992Pricing Interest Rate Options in a Two-Factor Cox–Ingersoll–Ross model of the Term Structure: Table 1 1991General Solutions of Some Interest Rate-Contingent Claim Pricing Equations 1990The valuation of options on yields

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2006SELF EXCITING THRESHOLD INTEREST RATES MODELS 2006A dynamic programming approach for pricing options embedded in bonds 2000Quadratic Term Structure Models 2002Squared Bessel Processes and Their Applications to the Square Root Interest Rate Model 2002The Riccati Equation in Mathematical Finance 1995FACTOR MODELS OF DOMESTIC AND FOREIGN INTEREST RATES WITH STOCHASTIC VOLATILITIES 2004Review Paper. Interest–rate term–structure pricing models: a review 2003Modeling the term structure of interest rates: A new approach

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