A tractable yield-curve model that guarantees positive interest rates

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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.
Original languageEnglish
Pages (from-to)269-284
JournalReview of Derivatives Research
Volume1
DOIs
Publication statusPublished - Oct 1996
Externally publishedYes

Keywords

  • yield-curve models
  • interest rate options
  • contingent claims
  • fundamental solutions

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