ASYMPTOTICS OF BOND YIELDS AND VOLATILITIES FOR EXTENDED VASICEK MODELS UNDER THE REAL-WORLD MEASURE

K. Fergusson ()
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K. Fergusson: University of Melbourne, Centre for Actuarial Studies, Victoria 3010, Australia

Annals of Financial Economics (AFE), 2017, vol. 12, issue 01, 1-33

Abstract: Vasicek's short rate model is a mean reverting model of the short rate which permits closed-form pricing formulae of zero coupon bonds and options on zero coupon bonds. This paper supplies proofs which are valid for any single factor mean reverting Gaussian short rate model having time-inhomogeneous parameters. The formulae are for the expected present value of payoffs under the real-world probability measure, known as actuarial pricing. Importantly, we give formulae for asymptotic levels of bond yields and volatilities for extended Vasicek models when suitable conditions are imposed on the model parameters.

Keywords: Actuarial pricing; stochastic short rate; Gaussian short rate; Vasicek model; Hull-White model (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1142/S2010495217500051

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