Posted: 25 Jun 1997
Date Written: September 1996
This paper surveys continuous-time models of the yield curve. Intuitive explanations are given of the mathematical tools (Ito's Lemma and Girsanov's Theorem) and the economic principles (risk-neutral pricing). The distinctions between the equilibrium and arbitrage approaches and between factor models and the HJM approach are described. The HJM equation linking forward rate drifts to forward rate volatilities is derived. The discussion of factor models includes: affine factor models, multifactor models, fitting the current yield curve, and solving the Vasicek and CIR models.
JEL Classification: G12, E43
Suggested Citation: Suggested Citation
Back, Kerry, Yield Curve Models: A Mathematical Review (September 1996). OLIN-96-04. Available at SSRN: https://ssrn.com/abstract=8383