The Market Price of Risk for Affine Interest Rate Term Structures

6th International AFIR-Colloquium, pp. 913-924, Nuremberg, October 1-31, 1996

12 Pages Posted: 14 Sep 2009

See all articles by Samuel H. Cox

Samuel H. Cox

University of Manitoba - Asper School of Business

Gennady Medvedev

Belarusian State University

Date Written: October 1-3, 1996

Abstract

This paper examines the market price of risk for discount bond prices under an affine term structure of interest rates. The usual relation plays two roles. First, it is the definition of market price of risk and, second, it provides a no arbitrage condition for the discount bond market. Here the relation defines the market price of risk for more general situations, but includes the processes which give rise to markets with no arbitrage. This allows a separate study of the no arbitrage condition. We solve for the parameters in the general case of affine term structure with constant parameters. The parameters depend explicitly on the market price of risk. Moreover, observations of the yield rate process do not, in general, uniquely determine the market price of risk.

Keywords: Stochastic process, interest rate, bond price, yield to maturity, market price of risk

JEL Classification: G12, C49, C32

Suggested Citation

Cox, Samuel H. and Medvedev, Gennady, The Market Price of Risk for Affine Interest Rate Term Structures (October 1-3, 1996). 6th International AFIR-Colloquium, pp. 913-924, Nuremberg, October 1-31, 1996. Available at SSRN: https://ssrn.com/abstract=1472982

Samuel H. Cox

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

Gennady Medvedev (Contact Author)

Belarusian State University ( email )

Nezavisimosti avenue, 4-326
Minsk, 220030
Belarus
+375172095448 (Phone)
+375172095448 (Fax)

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