 Bond Price Representations and the Volatility of Spot Interest RatesPeter Ritchken and L Sankarasubramanian Review of Quantitative Finance and Accounting, 1996, vol. 7, issue 3, 279-88 Abstract: A common approach to modeling the term structure of interest rates in a single-factor economy is to assume that the evolution of all bond prices can be described by the current level of the spot interest rate. This article investigates the restrictions that this assumption imposes. Specifically, we show that this Markovian restriction, together with the no-arbitrage requirement, curtails the relationship of forward rates and their volatilities relative to spot-rate volatilities. Among such Markovian models, only a few provide simple analytical relationships between bond prices and the spot interest rate. This article identifies the class of spot-rate volatility specifications that permit simple analytical linkages to be derived between bond prices and interest rates. Included in the class are the volatility structures used by Vasicek and by Cox, Ingersoll, and Ross. Surprisingly, no other volatility structures permit simple analytical representations. Copyright 1996 by Kluwer Academic Publishers Date: 1996 There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:7:y:1996:i:3:p:279-88 Ordering information: This journal article can be ordered from Access Statistics for this article Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee More articles in Review of Quantitative Finance and Accounting from Springer |
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