A Simple Model of the Nominal Term Structure of Interest Rates
20 Pages Posted: 27 Mar 2013
Date Written: March 26, 2013
This paper proposes a simple two-factor model of nominal term structure of interest rates, in which the log-price kernel has an autoregressive drift process and a nonlinear GARCH volatility process. Given these two state-variable processes, closed-form expressions are derived for the zero-coupon bond prices and the yield to maturity for a given time to maturity.
Keywords: interest rates, drift, AR, volatility, NGARCH, zero-coupon bond price, yield to maturity
JEL Classification: E43, G13, G21
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