Modeling Interest Rates and Options on Interest Rates

Patrice Poncet () and Roland Portait
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Patrice Poncet: ESSEC Business School
Roland Portait: ESSEC Business School

Chapter 17 in Capital Market Finance, 2022, pp 719-763 from Springer

Abstract: Abstract This chapter is devoted to the study of interest rate models and the valuation of interest rate products that depend on the techniques, models, and probabilistic theories that were in particular studied in Chaps. 10 and 11 and whose mathematical foundations are presented in Chaps. 18 , 19 , and 20 . It analyzes models based on the dynamics of the spot rate (Vasicek, Hull and White, and Cox, Ingersoll and Ross), studied in Sect. 17.1, and on the dynamics of the forward rate (Heath-Jarrow-Morton, Libor and Swap Market Models), presented in Sect. 17.2. Models that rely on modeling the yield curve are based on making explicit the stochastic process assumed to control the evolution of rates in the absence of arbitrage. These models, which lead to lognormal prices and rates, are compatible with the Black–Scholes–Merton model and can be associated with it, in particular for calibration purposes.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-030-84600-8_17

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DOI: 10.1007/978-3-030-84600-8_17

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