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

97 Pages Posted: 23 Jul 2001

See all articles by Francois Lhabitant

Francois Lhabitant

Kedge Capital Fund Management; EDHEC Business School

Rajna Gibson

University of Geneva - Geneva Finance Research Institute (GFRI)

Denis Talay

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

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Date Written: June 2001

Abstract

The last two decades have seen the development of a profusion of theoretical models of the term structure of interest rates. This study provides a general overview and a comprehensive comparative study of the most popular ones among both academics and practitioners. It also discusses their respective advantages and disadvantages in terms of bond and/or interest rate contingent claims continuous time valuation or hedging, parameter estimation, and calibration. Finally, it proposes a unified approach for model risk assessment. Despite the relatively complex mathematics involved, financial intuition rather then mathematical rigour is emphasised throughout. The classification by means of general characteristics should enable the understanding of the different features of each model, facilitate the choice of a model in specific theoretical or empirical circumstances, and allows the testing of various models with nested as well as non-nested specifications.

Keywords: Interest rates, term structure models

JEL Classification: G13

Suggested Citation

Lhabitant, Francois-Serge and Gibson, Rajna and Talay, Denis, Modeling the Term Structure of Interest Rates: A Review of the Literature (June 2001). Available at SSRN: https://ssrn.com/abstract=275076 or http://dx.doi.org/10.2139/ssrn.275076

Francois-Serge Lhabitant (Contact Author)

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

Rajna Gibson

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)

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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