Arbitrary Initial Term Structure within the CIR Model: A Perturbative Solution

Carlo Mari and Roberto Renò

Applied Mathematical Finance, 2006, vol. 13, issue 2, 143-153

Abstract: Single-factor interest rate models with constant coefficients are not consistent with arbitrary initial term structures. An extension which allows both arbitrary initial term structure and analytical tractability has been provided only in the Gaussian case. In this paper, within the context of the HJM methodology, an extension of the CIR model is provided which admits arbitrary initial term structure. It is shown how to calculate bond prices via a perturbative approach, and closed formulas are provided at every order. Since the parameter selected for the expansion is typically estimated to be small, the perturbative approach turns out to be adequate to our purpose. Using results on affine models, the extended CIR model is estimated via maximum likelihood on a time series of daily interest rate yields. Results show that the CIR model has to be rejected with respect to the proposed extension, and it is pointed out that the extended CIR model provides a more flexible characterization of the link between risk neutral and natural probability.

Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/13504860500395943 (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:taf:apmtfi:v:13:y:2006:i:2:p:143-153

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAMF20

DOI: 10.1080/13504860500395943

Access Statistics for this article

Applied Mathematical Finance is currently edited by Professor Ben Hambly and Christoph Reisinger

More articles in Applied Mathematical Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().