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Yield Curve Models: A Mathematical Review

OLIN-96-04

Posted: 25 Jun 1997  

Kerry Back

Rice University - Jones Graduate School of Business and Department of Economics

Date Written: September 1996

Abstract

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

Back, Kerry, Yield Curve Models: A Mathematical Review (September 1996). OLIN-96-04. Available at SSRN: https://ssrn.com/abstract=8383

Kerry Back (Contact Author)

Rice University - Jones Graduate School of Business and Department of Economics ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

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