Fixed-Income Pricing in a Non-Linear Interest-Rate Model

44 Pages Posted: 29 Oct 2014

See all articles by Jean-Paul Renne

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Date Written: October 2014

Abstract

This paper introduces a novel kind of interest-rate model offering simple analytical pricing formulas for swaps, futures, swaptions, caps and floors. The model is based on an original use of regime-switching features that makes it consistent with the non-linear behavior of interest rates. In particular, it accommodates the fact that short-term rate fluctuations are mainly driven by discrete changes in the central-bank policy rates. An application on euro-area data shows how the model can be exploited to infer risk-neutral probabilities of central-bank rate decisions.

Keywords: yield curve, option pricing, regime switching, market expectations

JEL Classification: E43, E47, G12, C53

Suggested Citation

Renne, Jean-Paul, Fixed-Income Pricing in a Non-Linear Interest-Rate Model (October 2014). Banque de France Working Paper No. 517, Available at SSRN: https://ssrn.com/abstract=2515330 or http://dx.doi.org/10.2139/ssrn.2515330

Jean-Paul Renne (Contact Author)

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

UNIL, Batiment Internef
Lausanne, 1015
Switzerland

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