A Square-Root Interest Rate Model Fitting Discrete Initial Term Structure Data

Erik Schlogl and Lutz Schlögl
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Lutz Schlögl: PIMCO

No 24, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This paper presents the one- and the multifactor versions of a term structure model in which the factor dynamics are given by Cox/Ingersoll/Ross (CIR) type "square root" diffusions with piecewise constant parameters. This model is fitted to initial term structures given by a finite number of data points, interpolating endogenously. Closed form and near-closed form solutions for a large class of fixed income derivatives are derived in terms of a compound noncentral chi-square distribution. An implementation of the model is discussed where the initial term structure of volatility is fitted via cap prices.

Date: 1999-12-01
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Published as: Schlogl, E. and Schlogl, L., 2000, "A Square Root Interest Rate Model Fitting Discrete Initial Term Structure Data", Applied Mathematical Finance, 7(3), 183-309.

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Journal Article: A square root interest rate model fitting discrete initial term structure data (2000)
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