A Square-Root Interest Rate Model Fitting Discrete Initial Term Structure Data

35 Pages Posted: 17 Apr 2000

See all articles by Erik Schlögl

Erik Schlögl

University of Technology Sydney (UTS), Quantitative Finance Research Centre; University of Cape Town (UCT) - The African Institute of Financial Markets and Risk Management; Faculty of Science, Department of Statistics, University of Johannesburg; Financial Research Network (FIRN)

Lutz Schlögl

University of Bonn - Institute of Statistics

Date Written: November 23, 1999

Abstract

This paper presents the one- and the multifactor versions of a term structure model in which the factor dynamics are given by Cox/Ingersoll/Ross (CIR) type "square root" diffusions with piecewise constant parameters. The model is fitted to initial term structures given by a finite number of data points, interpolating endogenously. Closed form and near--closed form solutions for a large class of fixed income derivatives are derived in terms of a compound noncentral chi-square distribution. An implementation of the model is discussed where the initial term structure of volatility is fitted via cap prices.

JEL Classification: E43, G12, G13

Suggested Citation

Schloegl, Erik and Schlögl, Lutz, A Square-Root Interest Rate Model Fitting Discrete Initial Term Structure Data (November 23, 1999). Available at SSRN: https://ssrn.com/abstract=205309 or http://dx.doi.org/10.2139/ssrn.205309

Erik Schloegl

University of Technology Sydney (UTS), Quantitative Finance Research Centre ( email )

Ultimo
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Sydney, NSW 2007
Australia
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HOME PAGE: http://www.schlogl.com

University of Cape Town (UCT) - The African Institute of Financial Markets and Risk Management ( email )

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Rondebosch
Cape Town, Western Cape 7700
South Africa

Faculty of Science, Department of Statistics, University of Johannesburg ( email )

Auckland Park, 2006
South Africa

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Lutz Schlögl (Contact Author)

University of Bonn - Institute of Statistics ( email )

Adenauerallee 24-26, 53113 Bonn
Bonn, 53113
Germany
+49 228 739271 (Phone)
+49 228 735050 (Fax)

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