A Simple Multi-factor, Time-Dependent-Parameter Model for the Term Structure of Interest Rates

Ren-Raw Chen and T L Tyler Yang

Review of Quantitative Finance and Accounting, 2002, vol. 19, issue 1, 5-20

Abstract: In this paper, we present a simple version of the Duffie and Kan model (1996). Our model can perfectly fit the yield curve and the volatility curve and further provide true closed form solutions to the pure discount bond price and its European contingent claims. Due to the specific factor structure in our model, the calibration exercise is easy to implement. This advantage will improve the computational efficiency in pricing American style claims. Copyright 2002 by Kluwer Academic Publishers

Date: 2002
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