Template-Type:ReDIF-Paper 1.0  
Title: Factor Models and the Shape of the Term Structure
Author-Name: Schloegl, Erik
Author-Name: Daniel Sommer
Classification-JEL:G13
Keywords: multifactor term structure models, spread options, term structure shapes, forward rate curves, mean
	reversion
Abstract: he present paper analyses a broad range of one- and multifactor models of the term structure of
	interest rates. We assess the influence of the number of factors, mean reversion, and the factor probability
	distributions on the term structure shapes the models generate, and use spread options as an aggregate measure
	of the relative importance assigned to rising and falling forward rate curves by the models considered. We
	derive valuation formulas for these contingent claims in the multifactor Gaussian and CIR-models. Our main
	result is that the specification of mean reversion and the number of factors are both much more important for
	the relative movements of interest rates than the distributional characteristics of the factors. To the extent
	that interest rate risk depends on the movements of different parts of the term structure relative to one
	another rather than on shifts of its absolute level, the distributional assumption on the factor dynamics is found
	to be essentially irrelevant.
Length: pages
Creation-Date: 1997-01
Revision-Date: 
Handle: RePEc:bon:bonsfb:395
File-URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonsfb/bonsfb395.pdf
File-Format: application/pdf
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