Modeling the Term Structure of Interest Rates: A Review of the Literature

171 Pages Posted: 29 Feb 2012

See all articles by Rajna Gibson

Rajna Gibson

University of Geneva - Geneva Finance Research Institute (GFRI)

Francois Lhabitant

Kedge Capital Fund Management; EDHEC Business School

Denis Talay

French National Institute for Research in Computer Science and Control (INRIA)

Multiple version iconThere are 2 versions of this paper

Date Written: February 29, 2012

Abstract

The last decades have seen the development of a profusion of theoretical models of the term structure of interest rates. The aim of this survey is to provide a comprehensive review of these continuous time modeling techniques of the term structure applicable to value and hedge default-free bonds and other interest rate derivatives. The originality of the survey lies in the fact that it provides a unifying framework in which most continuous-time term structure models can be nested and thus related to each other. Thus, we not only present the most important continuous-time term structure models in the literature but also provide a mathematically rigorous and unifying setting in which these models can be compared in terms of their similarities, distinguished in terms of their idiosyncratic features and in which their main contributions and limitations can easily be highlighted.

Keywords: term structure, interest rates, continuous-time models

JEL Classification: E43 Term Structure of Interest Rates, G12 Bond interest rates

Suggested Citation

Gibson, Rajna and Lhabitant, Francois-Serge and Talay, Denis, Modeling the Term Structure of Interest Rates: A Review of the Literature (February 29, 2012). Foundations and Trends in Finance, Vol. 5, No. 1-2, 2010. Available at SSRN: https://ssrn.com/abstract=2013361

Rajna Gibson (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+41.22.379.89.83 (Phone)

Francois-Serge Lhabitant

Kedge Capital Fund Management ( email )

28-30 The Parade
St Helier, JE1 1ZZ
Jersey

HOME PAGE: http://www.lhabitant.net

EDHEC Business School ( email )

393 Prom. des Anglais
Nice, 06200
France

Denis Talay

French National Institute for Research in Computer Science and Control (INRIA) ( email )

2004 route des Lucioles
BP 94
06902 Sophia Antipolis Cedex
France

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