Title: ON NON-EXISTENCE OF A ONE FACTOR INTEREST RATE MODEL FOR VOLATILITY AVERAGED GENERALIZED FONG-VASICEK TERM STRUCTURES
Abstract: C 1 Abstract. We study the generalized Fong-Vasicek two-factor interest rate model with stochas- tic volatility. In this model dispersion is assumed to follow a non-negative process with volatility proportional to the square root of dispersion, while the drift is assumed to be a general function. We consider averaged bond prices with respect to the limiting distribution of stochastic dispersion. The averaged bond prices depend on time and current level of the short rate like it is the case in many popular one-factor interest rate model including, in particular, the Vasicek and Cox-Ingersoll-Ross model. However, as a main result of this paper we show that there is no such one-factor model yielding the same bond prices as the averaged values described above.
Publication Year: 2008
Publication Date: 2008-01-01
Language: en
Type: article
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