Approximate Formulas for Zero-coupon Bonds

Fabricio Tourrucoo, Patrick S. Hagan and Gilberto F. Schleiniger

Applied Mathematical Finance, 2007, vol. 14, issue 3, 207-226

Abstract: Using perturbation methods, approximate formulas are obtained for zero-coupon bonds under the generalized Black-Karasinski model. The formulas perform well regarding accuracy and calibration to available data. For a special case, which corresponds to the Hull-White model, the approximation actually yields an exact solution. Numerical simulations are presented that partially validate the asymptotic approximation. A calibration strategy is investigated in order to fit the model to given data on discount rates.

Keywords: Perturbation methods; pricing fixed-income instruments; generalized Black-Karasinski model; approximate and exact solutions; calibration (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (7)

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DOI: 10.1080/13504860600858204

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