Random step functions model for interest rates

We propose a new model for pricing of bonds and their options based on the short rate when the latter exhibits a step function like behaviour. The model produces realistic looking spot rate curves, and allows one to derive explicit formulae for the yield curve and put and cap options. This model is appropriate for markets with pegged rates, such as the Australian market. We also give a general result on bond prices when the short rate is a sum of independent processes.

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Year of publication:	2002-11-13
Authors:	Virag, Eleanor ; Klebaner, Fima C. ; Borovkov, Konstantin
Published in:	Finance and Stochastics. - Springer. - Vol. 7.2003, 1, p. 123-143
Publisher:	Springer
Subject:	Interest rates models \| Markov point processes \| jump processes \| bonds \| options on bonds

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Extent:	application/pdf
Type of publication:	Article
Notes:	received: July 2001; final version received: April 2002
Classification:	E43 - Determination of Interest Rates; Term Structure Interest Rates ; G12 - Asset Pricing ; G13 - Contingent Pricing; Futures Pricing
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005759620