A two-mean reverting-factor model of the term structure of interest rates


Autoria(s): Moreno, Manuel
Contribuinte(s)

Universitat Pompeu Fabra. Departament d'Economia i Empresa

Data(s)

15/09/2005

Resumo

This paper presents a two--factor model of the term structure ofinterest rates. We assume that default free discount bond prices aredetermined by the time to maturity and two factors, the long--term interestrate and the spread (difference between the long--term rate and theshort--term (instantaneous) riskless rate). Assuming that both factorsfollow a joint Ornstein--Uhlenbeck process, a general bond pricing equationis derived. We obtain a closed--form expression for bond prices andexamine its implications for the term structure of interest rates. We alsoderive a closed--form solution for interest rate derivatives prices. Thisexpression is applied to price European options on discount bonds andmore complex types of options. Finally, empirical evidence of the model'sperformance is presented.

Identificador

http://hdl.handle.net/10230/989

Idioma(s)

eng

Direitos

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info:eu-repo/semantics/openAccess

<a href="http://creativecommons.org/licenses/by-nc-nd/3.0/es/">http://creativecommons.org/licenses/by-nc-nd/3.0/es/</a>

Palavras-Chave #Finance and Accounting #term structure of interest rates #bond pricing equation #two--factor models #ornstein--uhlenbeck processes #interest rate derivatives
Tipo

info:eu-repo/semantics/workingPaper