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

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Journal of Futures Markets, 23, 11, 1075-1105, 2003
http://hdl.handle.net/10230/989
To cite or link this document: http://hdl.handle.net/10230/989
dc.contributor.author Moreno, Manuel
dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa
dc.date.issued 1996-11-01
dc.identifier.citation Journal of Futures Markets, 23, 11, 1075-1105, 2003
dc.identifier.uri http://hdl.handle.net/10230/989
dc.description.abstract This paper presents a two--factor model of the term structure of interest rates. We assume that default free discount bond prices are determined by the time to maturity and two factors, the long--term interest rate and the spread (difference between the long--term rate and the short--term (instantaneous) riskless rate). Assuming that both factors follow a joint Ornstein--Uhlenbeck process, a general bond pricing equation is derived. We obtain a closed--form expression for bond prices and examine its implications for the term structure of interest rates. We also derive a closed--form solution for interest rate derivatives prices. This expression is applied to price European options on discount bonds and more complex types of options. Finally, empirical evidence of the model's performance is presented.
dc.language.iso eng
dc.relation.ispartofseries Economics and Business Working Papers Series; 193
dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.title A two-mean reverting-factor model of the term structure of interest rates
dc.type info:eu-repo/semantics/workingPaper
dc.date.modified 2014-06-03T07:13:52Z
dc.subject.keyword Finance and Accounting
dc.subject.keyword term structure of interest rates
dc.subject.keyword bond pricing equation
dc.subject.keyword two--factor models
dc.subject.keyword ornstein--uhlenbeck processes
dc.subject.keyword interest rate derivatives
dc.rights.accessRights info:eu-repo/semantics/openAccess


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