A multi-quality model of interest rates

Masaaki Kijima, Keiichi Tanaka and Tony Wong

Quantitative Finance, 2009, vol. 9, issue 2, 133-145

Abstract: We consider a consistent pricing model of government bonds, interest-rate swaps and basis swaps in one currency within the no-arbitrage framework. To this end, we propose a three yield-curve model, one for discounting cash flows, one for calculating LIBOR deposit rates and one for calculating coupon rates of government bonds. The derivation of the yield curves from observed data is presented, and the option prices on a swap or a government bond are studied. A one-factor quadratic Gaussian model is proposed as a specific model, and is shown to provide a very good fit to the current Japanese low-interest-rate environment.

Keywords: Interest rates; Pricing model; Yield curves (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (36)

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DOI: 10.1080/14697680802624963

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