Bond pricing when the short term interest rate follows a threshold process

Wolfgang Lemke and Theofanis Archontakis

No 2006,06, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: Using a stochastic discount factor approach, we derive the exact solution for arbitrage-free bond yields for the case that the short-term interest rate follows a threshold process with the intercept switching endogenously. The yield functions, mapping the one-month rate into n-period yields, respectively. This is in contrast to linear short-rate process which imply an affine yield function. The intervals for which convexity or concavity prevails increase with time to maturity.

Keywords: Threshold process; term structure of interest rates; nonlinear yield function (search for similar items in EconPapers)
JEL-codes: C63 E43 G12 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-mac and nep-mon
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Journal Article: Bond pricing when the short-term interest rate follows a threshold process (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp1:4243

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