Title: A FOUR-PARAMETER INTEREST RATES MODEL INCORPORATING AVERAGE OF PAST SHORT RATES
Abstract: We consider a four-parameter short rate model for the evolution of interest rates. In this model we take normal level of the short rate as an exponentially weighted average of the past short rates as suggested by Malkiel (14). We first derive the differential equation for the price of a zero-coupon bond under this model. A complete explicit solution of the partial differential equation is obtained under a suitable simplifying assumption to obtain an ex- plicit model for the evolution of interest rates. The relevant yield curve is also obtained. We then consider a most desirable feature of an interest rates model, incorporating current term structure of interest rates into the model. Again, a complete explicit solution is obtained together with the yield curve and its asymptotic behaviour. A well-known previously given model is included and discussed in the context of our present interest rates model.
Publication Year: 2015
Publication Date: 2015-01-01
Language: en
Type: article
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