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Taking Positive Interest Rates Seriously

Enlin Pan
affiliation not provided to SSRN

Liuren Wu
City University of New York, CUNY Baruch College - Zicklin School of Business

October 19, 2003

Abstract:
We present a dynamic term structure model in which interest rates of all maturities are bounded from below at zero. Positivity and continuity, combined with no arbitrage, result in only one functional form for the term structure with three sources of risk. One dynamic factor controls the level of the interest rate and follows a special two-parameter square-root process under the risk-neutral measure. The two parameters of the process determine the other two sources of risk and act as two static factors. This model has no other parameters to estimate and hence bears no other risks.

Keywords: Term structure, consistency, positivity, quadratic forms

JEL Classifications: E43, G12, G13

Working Paper Series

Date posted: September 02, 2004 ; Last revised: September 24, 2004

Suggested Citation

Pan, Enlin and Wu, Liuren, Taking Positive Interest Rates Seriously (October 19, 2003). Available at SSRN: http://ssrn.com/abstract=585461

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Liuren Wu (Contact Author) City University of New York, CUNY Baruch College - Zicklin School of Business ( email ) One Bernard Baruch Way Box B10-225 New York, NY 10010 United States 646-312-3509 (Phone) 646-312-3451 (Fax) HOME PAGE: http://faculty.baruch.cuny.edu/lwu/
Enlin Pan affiliation not provided to SSRN

Abstract

References (46)

Date posted: September 02, 2004 ; Last revised: September 24, 2004

Suggested Citation

Contact Information

Liuren Wu (Contact Author)

Enlin Pan