 Equilibrium Short-Rate Models Vs No-Arbitrage Models: Literature Review and Computational ExamplesDushko Josheski () and Mico Apostolov Econometrics. Advances in Applied Data Analysis, 2021, vol. 25, issue 3, 42-71 Abstract: In this paper equilibrium short-rate models are compared against no-arbitrage short-rate models. This article is composed of the introduction to this literature and a review, followed by numerical examples of one-factor short-rate models; the Cox-Ingersoll-Ross (CIR) model and the Vasicek model. No-arbitrage models were presented through the Hull-White (HW) model, the Binomial lattice model for bond pricing and interest rate modelling, the Black-Karasinski (BK) model, and the Heath-Jarrow-Morton (HJM) model. The results prove that no single interest rate model exists that can be used for all purposes. These models were compared in terms of volatility, mean reversion process and convergence. The end results confirm the dependence of volatility on the level rate as a determinant of the predictive success of these models. Keywords: equilibrium models; one factor short-rate models; no-arbitrage models; Vasicek model; Hull-White (HW) model; Black-Karasinski (BK) model; Heath-Jarrow-Morton (HJM) model; Cox-Ingersoll-Ross (CIR) model (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:vrs:eaiada:v:25:y:2021:i:3:p:42-71:n:4 Access Statistics for this article Econometrics. Advances in Applied Data Analysis is currently edited by Józef Dziechciarz More articles in Econometrics. Advances in Applied Data Analysis from Sciendo |
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