Asymptotics of Bond Yields and Volatilities for Extended Vasicek Models Under the Real-World Measure

Abstract

Vasicek's short rate model is a mean reverting model of the short rate which permits closedform pricing formulae of zero coupon bonds and options on zero coupon bonds. This paper supplies proofs which are valid for any single factor mean reverting Gaussian short rate model having time-inhomogeneous parameters. The formulae are for the expected present value of payoffs under the real-world probability measure, known as actuarial pricing. Importantly, we give formulae for asymptotic levels of bond yields and volatilities for extended Vasicek models when suitable conditions are imposed on the model parameters.