A simple multi-factor, time-dependent-parameter model for the term structure of interest rates

Ren Raw Chen; T. L.Tyler Yang

doi:10.1023/A:1015743507959

A simple multi-factor, time-dependent-parameter model for the term structure of interest rates

Ren Raw Chen^*, T. L.Tyler Yang

^*Corresponding author for this work

Research output: Contribution to journal › Journal Article › peer-review

3 Scopus citations

Abstract

In this paper, we present a simple version of the Duffie and Kan model (1996). Our model can perfectly fit the yield curve and the volatility curve and further provide true closed form solutions to the pure discount bond price and its European contingent claims. Due to the specific factor structure in our model, the calibration exercise is easy to implement. This advantage will improve the computational efficiency in pricing American style claims.

Original language	English
Pages (from-to)	5-20
Number of pages	16
Journal	Review of Quantitative Finance and Accounting
Volume	19
Issue number	1
DOIs	https://doi.org/10.1023/A:1015743507959
State	Published - 2002
Externally published	Yes

Keywords

Factor model
Term structure of interest rates
Volatility curve
Yield curve

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10.1023/A:1015743507959

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abstract = "In this paper, we present a simple version of the Duffie and Kan model (1996). Our model can perfectly fit the yield curve and the volatility curve and further provide true closed form solutions to the pure discount bond price and its European contingent claims. Due to the specific factor structure in our model, the calibration exercise is easy to implement. This advantage will improve the computational efficiency in pricing American style claims.",

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AB - In this paper, we present a simple version of the Duffie and Kan model (1996). Our model can perfectly fit the yield curve and the volatility curve and further provide true closed form solutions to the pure discount bond price and its European contingent claims. Due to the specific factor structure in our model, the calibration exercise is easy to implement. This advantage will improve the computational efficiency in pricing American style claims.

KW - Factor model

KW - Term structure of interest rates

KW - Volatility curve

KW - Yield curve

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A simple multi-factor, time-dependent-parameter model for the term structure of interest rates

Abstract

Keywords

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