Resource title

Bond pricing when the short term interest rate follows a threshold process

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Resource description

Using a stochastic discount factor approach, we derive the exact solution for arbitrage-free bond yields for the case that the short-term interest rate follows a threshold process with the intercept switching endogenously. The yield functions, mapping the one-month rate into n-period yields, respectively. This is in contrast to linear short-rate process which imply an affine yield function. The intervals for which convexity or concavity prevails increase with time to maturity.

Resource author

Wolfgang Lemke, Theofanis Archontakis

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/19634

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Adapt according to the presented license agreement and reference the original author.