SFB 303 Discussion Paper No. B - 396

Author: Schloegl, Erik, and Lutz Schloegl
Title: A Tractable Term Structure Model with Endogenous Interpolation and Positive Interest Rates
Abstract: This paper presents the one- and the multifactor versions of a term structure model in which the factor dynamics are given by Cox/Ingersoll/Ross (CIR) type "square root" diffusions with piecewise constant parameters. The model is fitted to initial term structures given by a finite number of data points, interpolating endogenously. Closed form and near-closed form solutions for a large class of fixed income contingent claims are derived in terms of a noncentral chi-square distribution whose noncentrality parameter is in turn noncentral chi-square distributed. Implementation details on this distribution are given in the appendix.
Keywords: term structure of interest rates, fixed income derivatives, square root process, chi-square distribution
JEL-Classification-Number: G13
Creation-Date: November 1997
URL: ../1997/b/bonnsfb396.pdf"

SFB 303 Homepage

19.05.1998, Webmaster