Pricing Claims Under GARCH-Level Dependent Interest Rate Processes

V. Cvsa () and P. Ritchken ()
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V. Cvsa: Weatherhood School of Management, Case Western Reserve University, Cleveland, Ohio
P. Ritchken: Weatherhood School of Management, Case Western Reserve University, Cleveland, Ohio

Management Science, 2001, vol. 47, issue 12, 1693-1711

Abstract: This article considers the pricing of interest-rate-sensitive claims when the underlying interest rate is driven by a two-state-variable GARCH process. Analytical solutions are established for the case when the innovations in the short rate are normal and/or chi-squared random variables and the volatility of rates take on a special GARCH form. GARCH models that nest level-dependent interest rate models, including the Cox, Ingersoll, and Ross model, are also considered. Algorithms are provided that permit the efficient pricing of American-style interest rate claims under a rather broad array of GARCH-Level dependent processes.

Keywords: Option Pricing; GARCH Processes; Interest Rate Claims (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (5)

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