A tractable yield-curve model that guarantees positive interest rates |
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Authors: | Antoon Pelsser |
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Affiliation: | (1) Department of Finance, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands;(2) Structured Products Group (AA 4410), ABN-Amro Bank, P.O. Box 283, 1000 EA Amsterdam, The Netherlands |
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Abstract: | Yield-curve models suggested previously in the literature seem always to make a tradeoff between analytical tractability and a realistic behavior of the interest rates. In this paper we analyze a model that combines both features into one model: the interest rates are always positive and the model has a rich analytical structure. Not only is our model theoretically appealing, we also provide empirical evidence that our model can fit observed cap and floor prices better than the Hull-White model.The author is grateful to Stephen Figlewski, Ton Vorst, Carien Dam, Douglas Bongartz-Renaud, participants of the Second International Conference on Computing in Finance and Economics in Geneva and especially Marti Subrahmanyam and two anonymous referees for comments and helpful suggestions. |
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Keywords: | yield-curve models interest rate options contingent claims fundamental solutions |
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