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A yield-factor model of interest rates (1996)
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| Venue: | Math. Finance |
| Citations: | 664 - 23 self |
BibTeX
@ARTICLE{Duffie96ayield-factor,
author = {Darrell Duffie},
title = {A yield-factor model of interest rates},
journal = {Math. Finance},
year = {1996},
pages = {379--406}
}
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Abstract
This paper presents a consistent and arbitrage-free multifactor model of the term structure of interest rates in which yields at selected fixed maturities follow a parametric multivariate Markov diffusion process with “stochastic volatility. ” The yield of any zero-coupon bond is taken to be a maturitydependent affine combination of the selected “basis ” set of yields. We provide necessary and sufficient conditions on the stochastic model for this affine representation. We include numerical techniques for solving the model, as wcll as numerical techniques for calculating the prices of term-structure derivative prices. The case of jump diffusions i \ also considered. I.
Keyphrases
interest rate yield-factor model numerical technique jump diffusion fixed maturity stochastic volatility parametric multivariate markov diffusion process zero-coupon bond maturitydependent affine combination term structure arbitrage-free multifactor model basis set stochastic model sufficient condition affine representation term-structure derivative price
