A square root interest rate model fitting discrete initial term structure data

Erik Schlogl and Lutz Schlogl

Applied Mathematical Finance, 2000, vol. 7, issue 3, 183-209

Abstract: This paper presents one-factor and multifactor versions of a term structure model in which the factor dynamics are given by Cox/Ingersoll/Ross (CIR) type 'square root' diffusions with piece wise constant parameters. The model is fitted to initial term structures given by a finite number of data points, interpolating endogenously. Closed form and near closed form solutions for a large class of fixed income derivatives are derived in terms of a compound noncentral chi-square distribution. An implementation of the model is discussed where the initial term structure of volatility is fitted via cap prices.

Keywords: Term Structure Of Interest Rates Fixed Income Derivatives Square Root Process Chi-SQUARE Distribution (search for similar items in EconPapers)
Date: 2000
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Working Paper: A Square-Root Interest Rate Model Fitting Discrete Initial Term Structure Data (1999)
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DOI: 10.1080/13504860110034770

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