Stylised Properties of the Interest Rate Term Structure Under The Benchmark Approach

Kevin Fergusson and Eckhard Platen ()

No 351, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: Market models which re ect stylised properties of the interest rate term structure are widely used for modelling and pricing interest rate derivatives. We consider a market model involving the short rate and a diversified global stock index. We illustrate the stylised properties of the interest rate term structure implied by a system of stochastic differential equations specifying the short rate and the discounted stock index under the benchmark approach. Comparison with empirical evidence demonstrates the explanatory power of a discounted stock index modelled by a squared Bessel process.

Keywords: Benchmark Approach; interest rate; numeraire portfolio; yield curve; zero coupon bond (search for similar items in EconPapers)
Pages: 23 pages
Date: 2014-08-01
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Citations: View citations in EconPapers (3)

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