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

J-P. Renne

Working papers from Banque de France

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. (search for similar items in EconPapers)
JEL-codes: C53 E43 E47 G12 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2014
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:517

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