Discrete-Time Models of Bond Pricing

38 Pages Posted: 22 Oct 1998 Last revised: 12 May 2000

See all articles by David K. Backus

David K. Backus

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group

Chris Telmer

Carnegie Mellon University - David A. Tepper School of Business

Date Written: September 1998

Abstract

We explore a variety of models and approaches to bond pricing, including those associated with Vasicek, Cox-Ingersoll-Ross, Ho and Lee, and Heath-Jarrow-Morton, as well as models with jumps, multiple factors, and stochastic volatility. We describe each model in a common theoretical framework and explain the reasoning underlying the choice of parameter values. Our framework has continuous state variables but discrete time, which we regard as a convenient middle ground between the stochastic calculus of high theory and the binomial models of classroom fame. In this setting, most of the models we examine are easily implemented on a spreadsheet.

Suggested Citation

Backus, David K. and Foresi, Silverio and Telmer, Christopher I., Discrete-Time Models of Bond Pricing (September 1998). NBER Working Paper No. w6736. Available at SSRN: https://ssrn.com/abstract=130068

David K. Backus (Contact Author)

NYU Stern School of Business

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HOME PAGE: http://pages.stern.nyu.edu/~dbackus/

National Bureau of Economic Research (NBER)

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HOME PAGE: http://pages.stern.nyu.edu/~dbackus/

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group ( email )

32 Old Slip, 24th Floor
New York, NY 10005
United States
(212) 357-3508 (Phone)

Christopher I. Telmer

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
(412) 268-8838 (Phone)
(412) 268-6837 (Fax)

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