An Integrated Model for the Term and Volatility Structures of Interest Rates

Posted: 25 May 1998

See all articles by Ren-Raw Chen

Ren-Raw Chen

Fordham University - Gabelli School of Business

Tyler T. Yang

Federal Home Loan Mortgage Corporation (FHLMC) - Portfolio Management

Date Written: Undated

Abstract

In this paper, we present a model for the term structure of interest rates, which integrates the existing multifactor and time dependent approaches of term structure models. This integrated model uses the time series data so that it has macroeconomic implications such as interest rate volatility and mean reversion. It also uses the cross sectional data so that it fits the yield curve and the volatility curve. In contrast to other multifactor time dependent models, this model is easy to implement. It has closed form solutions for discount bonds as well as their European claims. For American claims, the lattice model can be constructed as easily as a fixed parameter model. The fitting of the volatility curve and the fitting of the yield curve are separable in the model. The capability of combining both time series and cross sectional information in a computationally tractable framework is the main contribution of this model.

JEL Classification: E43, G12, G13

Suggested Citation

Chen, Ren-Raw and Yang, Tyler T., An Integrated Model for the Term and Volatility Structures of Interest Rates (Undated). Available at SSRN: https://ssrn.com/abstract=7537

Ren-Raw Chen

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Bronx, NY 10458
United States

Tyler T. Yang (Contact Author)

Federal Home Loan Mortgage Corporation (FHLMC) - Portfolio Management ( email )

McLean, VA 22101
United States

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