Abstract
There exists some general aspects of using a factor model within the affine class of Duffie and Kan (1996) to price interest rate derivatives. In modeling bond markets in section 1.2.1 we examined the following interrelated peculiarities: the incompleteness of the market, the maturity independent risk premium, and the pricing of interest rate derivatives. To study these aspects we used a single-factor model that chooses the instantaneous short rate as the state variable:
“More recently it has been recognized that, if assumptions are made about the stochastic evolution of the instantaneous rate of interest in a continuous time model, much richer theories of bond pricing can be derived, which constrain the relationship between the risk premia on bonds of different maturities.”1
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© 2004 Springer-Verlag Berlin Heidelberg
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Kellerhals, B.P. (2004). Term Structure Model. In: Asset Pricing. Springer Finance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-24697-8_9
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DOI: https://doi.org/10.1007/978-3-540-24697-8_9
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-642-05879-0
Online ISBN: 978-3-540-24697-8
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