A Tractable Yield-Curve Model That Guarantees Positive Interest Rates

Author: Pelsser A.

Source: Review of Derivatives Research, Volume 1, Number 3, 1996 , pp. 269-284(16)

Publisher: Springer

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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.

Keywords: yield-curve models; interest rate options; contingent claims; fundamental solutions

Language: English

Document Type: Regular paper

Affiliations: 1: Erasmus University Rotterdam, Department of Finance, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands and ABN-Amro Bank, Structured Products Group (AA 4410), P.O. Box 283, 1000 EA Amsterdam, The Netherlands; pelsser@few.eur.nl

Publication date: 1996-01-01