A Two-Factor Model of the Term Structure: An Approximate Analytical Solution

Schaefer, Stephen M.; Schwartz, Eduardo S.

doi:10.2307/2330783

Cited by 119 publications

(86 citation statements)

References 8 publications

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“…Then we introduce a dynamic measure of risk to the incomplete market, under which we have acquired the optimal replication of a contingent claim in the finance market which is induced by a risk neutral probability. With an application of a generalized Clark formula [5]the paper provides the optimal hedging strategy for a contingent claim. The preferred spelling of the word "acknowledgment" in America is without an "e" after the "g".…”

Section: Option Pricing Theory Under Additional Marketmentioning

confidence: 99%

Option Pricing with the Credit Risk in Incomplete Markets

Wang¹

2014

Proceedings of the 2014 International Conference on Computer, Communications and Information Technology

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-The paper considers the financial derivatives model with the credit risk. If the market is incomplete, we though the value of corporation value model, the credit risk will be introduced to options pricing. First of all, the general valuation formula in given about the Europe option under the condition of incomplete market and default risk .Second, the use of Black----Scholes the risk-neutral option pricing for reference, application of martingale pricing and probability methods, The research work of paper will be helpful to enrich the study derivatives pricing with credit risk.

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Section: Option Pricing Theory Under Additional Marketmentioning

confidence: 99%

Option Pricing with the Credit Risk in Incomplete Markets

Wang¹

2014

Proceedings of the 2014 International Conference on Computer, Communications and Information Technology

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“…Part of this view derives from the fact that the returns on bonds of all maturities are not perfectly correlated. 1 In addition to this simple point , a n umber of theoretical studies promote multifactor bond pricing, including Brennan and Schwartz 1979, Schaefer and Schwartz 1984, Heath, Jarrow and Morton 1988, Longsta and Schwartz 1992, and Chen and Scott 1995 others. Empirical studies of these and related models generally support the existence of multiple factors see, for example, Dai and Singleton 1997, Litterman and Scheinkman 1991, Longsta and Schwartz 1992, Stambaugh 1988, Pearson and Sun 1989, and Andersen and Lund 1997 .…”

Section: Introductionmentioning

confidence: 99%

A Multifactor, Nonlinear, Continuous‐Time Model of Interest Rate Volatility*

Boudoukh¹,

Richardson²,

Stanton³

et al. 2010

Volatility and Time Series Econometrics

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This paper presents a general, nonlinear version of existing multifactor models, such as Longsta and Schwartz 1992 . The novel aspect of our approach is that rather than choosing the model parameterization out of thin air", our processes are generated from the data using approximation methods for multifactor continuous-time Markov processes. In applying this technique to the short-and long-end of the term structure for a general two-factor di usion process for interest rates, a major nding is that the volatility o f i n terest rates is increasing in the level of interest rates only for sharply upward sloping term structures. In fact, the slope of the term structure plays a larger role in determining the magnitude of the di usion coe cient.As an application, we analyze the model's implications for the term structure of term premiums.

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“…Brennan and Schwartz (1979) use the instantaneous interest rate and the long-term rate as state variables. In a similar way, Schaefer and Schwartz (1984) consider a model based on the consol rate (the yield on a bond with in nite maturity) and the spread, the di erence between the consol rate and the short rate. Heath, Jarrow and Morton (1992) use two unspeci ed factors that a ect forward rates.…”

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confidence: 99%

“…In the spirit of Schaefer and Schwartz (1984), we rede ne variables and model default free discount bond prices as a function of time to maturity and two factors, the long-term interest rate and the spread (di erence between the long-term rate and the short-term (instantaneous) riskless rate of interest). As interest rates have a tendency to be pulled back to a long-run level, a phenomenon known as mean reversion, we re ect this fact assuming that each factor follows an Ornstein-Uhlenbeck process.…”

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A two‐mean reverting‐factor model of the term structure of interest rates

Moreno

2003

Journal of Futures Markets

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The term structure of interest rates for default-free discount bonds has been a topic covered in many papers. As a rst approximation to its analysis, onefactor models were developed. These models assume that the movements of the yield curve are determined by a single state variable. This state variable is usually the instantaneous riskless interest rate and is modeled as a di usion process. Examples of these models are Vasicek (1977), Dothan (1978) and Cox, Ingersoll and Ross (hereafter CIR) (1985b). An empirical comparison

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A Two-Factor Model of the Term Structure: An Approximate Analytical Solution

Cited by 119 publications

References 8 publications

Option Pricing with the Credit Risk in Incomplete Markets

Option Pricing with the Credit Risk in Incomplete Markets

A Multifactor, Nonlinear, Continuous‐Time Model of Interest Rate Volatility*

A two‐mean reverting‐factor model of the term structure of interest rates

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