Modeling the term structure of interest rates with general diffusion processes: A moment approximation approach

Hideyuki Takamizawa and Isao Shoji

Journal of Economic Dynamics and Control, 2009, vol. 33, issue 1, 65-77

Abstract: We propose an analytical approximation of the term structure of interest rates under general diffusion processes of the short-rate and state variables. A method of approximating conditional moments as the solution to a system of ordinary differential equations is applied to the pricing of bonds. Numerical experiments based on two illustrative models show that the second-order approximation is accurate for maturities of up to five years and the third-order approximation is effective for longer maturities. We also show the possibility of improving the second-order approximation without much increasing the computational burden.

Keywords: Short-rate; Term; structure; Approximation; Conditional; moment (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Modeling the Term Structure of Interest Rates with General Diffusion Processes: A Moment Approximation Approach (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:33:y:2009:i:1:p:65-77

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