Bond pricing under the generalised Black-Karasinski models

Nawdha Thakoor, Désiré Yannick Tangman and Muddun Bhuruth

International Journal of Financial Markets and Derivatives, 2017, vol. 6, issue 1, 57-73

Abstract: Due to the lognormality of the short rate under the Black-Karasinski interest model, closed-form expressions for zero-coupon bond prices are not available. Existing methods for computing approximate prices include perturbation methods for solving the reaction-diffusion equation satisfied by the bond-price and the exponent expansion for computing the bond price via Arrow-Debreu prices. Perturbation methods are accurate for small volatility problems whereas the exponent expansion is accurate for small maturities. This work proposes a high-order computational method that works for all parameter settings. Several numerical examples are described to illustrate the high accuracy and rapid computation of bond prices.

Keywords: zero-coupon bond prices; generalised Black-Karasinski models; reaction-diffusion equation; fourth-order discretisations. (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.inderscience.com/link.php?id=86754 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ids:ijfmkd:v:6:y:2017:i:1:p:57-73

Access Statistics for this article

More articles in International Journal of Financial Markets and Derivatives from Inderscience Enterprises Ltd
Bibliographic data for series maintained by Sarah Parker ().