Conditional Gaussian models of the term structure of interest rates

Simon H. Babbs ()
Additional contact information
Simon H. Babbs: Bank One and University of Warwick, 1 Bank One Plaza Suite# 0690, Chicago IL 60670, USA Manuscript

Finance and Stochastics, 2002, vol. 6, issue 3, 333-353

Abstract: We present a new family of yield curve models, termed "Conditional Gaussian". It provides both simplicity and extreme flexibility in constructing "market models". Almost any conditional co-variance structure - including features designed to capture volatility "skews" and/or dependence on past returns - can be used, and the model can be embedded into a continuous-time whole yield curve model consistent with general equilibrium. Conditionally Gaussian increments in log one-plus-interest-rates enable "vanilla" and path-dependent derivatives to be valued easily by Monte Carlo, whether or not their payoffs depend solely on the particular market rates being modelled directly.

Keywords: Interest rate models; market models; Conditional Gaussian (search for similar items in EconPapers)
JEL-codes: E43 G13 (search for similar items in EconPapers)
Date: 2002-05-17
Note: received: June 1999; final version received: September 2001
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.de/link/service/journals/00780/papers/2006003/20060333.pdf (application/pdf)
Access to the full text of the articles in this series is restricted

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:spr:finsto:v:6:y:2002:i:3:p:333-353

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().