Abstract

http://ssrn.com/abstract=1732931
 
 

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Bilinear Term Structure Model


Christian Gourieroux


University of Toronto - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO); Ecole Nationale de la Statistique et de l'Administration Economique (ENSAE); National Bureau of Economic Research (NBER)

Alain Monfort


National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); National Bureau of Economic Research (NBER); Maastricht University

September 14, 2010

Mathematical Finance, Vol. 21, Issue 1, pp. 1-19, 2010

Abstract:     
The Gaussian Affine Term Structure Model (ATSM) introduced by Duffie and Kan is often used in finance to price derivatives written on interest rates or to compute the reserve to hedge a portfolio of credits (CreditVaR), and in macroeconomic applications to study the links between real activity and financial variables. However, a standard three-factor ATSM, for instance, implies a deterministic affine relationship between any set of four rates, with different times-to-maturity, and these relationships are not observed in practice. In this paper, we introduce a new class of affine term structure models, called Bilinear Term Structure Model (BTSM). This extension breaks down the deterministic relationships between rates in structural factor models by introducing lagged factor values, and the linear dependence by considering quadratic effects of the factors.

Number of Pages in PDF File: 19

Keywords: affine term structure, quadratic term structure, monetary policy, credit risk, Wishart process, bilinear process

Accepted Paper Series


Date posted: January 1, 2011  

Suggested Citation

Gourieroux, Christian and Monfort, Alain, Bilinear Term Structure Model (September 14, 2010). Mathematical Finance, Vol. 21, Issue 1, pp. 1-19, 2010. Available at SSRN: http://ssrn.com/abstract=1732931 or http://dx.doi.org/10.1111/j.1467-9965.2010.00424.x

Contact Information

Christian Gourieroux (Contact Author)
University of Toronto - Department of Economics ( email )
150 St. George Street
Toronto, Ontario M5S 3G7
Canada
416-978-4349 (Phone)
416-978-6713 (Fax)
Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )
2020 rue University, 25th Floor
Montreal, Quebec H3C 3J7
Canada
Ecole Nationale de la Statistique et de l'Administration Economique (ENSAE) ( email )
15 Boulevard Gabriel Peri
92245 Malakoff Cedex
France
33.4117.7666 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Alain Monfort
National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )
15 Boulevard Gabriel Peri
92245 Malakoff Cedex, 1 92245
France
+33 1 4117 6079 (Phone)
+33 1 4117 6046 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Maastricht University
P.O. Box 616
Maastricht, 6200MD
Netherlands
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