33 Pages Posted: 30 May 2008 Last revised: 1 Feb 2013
Date Written: December 20, 2012
In this paper we present a multi-factor continuous-time autoregressive moving-average (CARMA) model for the short and forward interest rates. This models is able to present an adequate statistical description of the short and forward rate dynamics. We show that this is a tractable term structure model and provide closed-form solutions to bond prices, yields, bond option prices, and the term structure of forward rate volatility. We demonstrate the capabilities of our model by calibrating it to a panel of spot rates and the empirical volatility of forward rates simultaneously, making the model consistent with both the spot rate dynamics and forward rate volatility structure.
Keywords: interest rate model, short rate, forward rate, term structure, CARMA process, bond pricing, bond option pricing, yield curve, volatility curve, calibration
JEL Classification: C50, E43, G13
Suggested Citation: Suggested Citation
Andresen, Arne and Benth, Fred Espen and Koekebakker, Steen and Zakamulin, Valeriy, The CARMA Interest Rate Model (December 20, 2012). Available at SSRN: https://ssrn.com/abstract=1138632 or http://dx.doi.org/10.2139/ssrn.1138632