THE CARMA INTEREST RATE MODEL

Arne Andresen (), Fred Espen Benth (), Steen Koekebakker () and Valeriy Zakamulin ()
Additional contact information
Arne Andresen: Department of Industrial Economics and Technology Management, Norwegian University of Science and Technology, No-7491 Trondheim, Norway
Fred Espen Benth: Center of Mathematics for Applications, University of Oslo, P.O. Box 1053, Blindern, N-0316 Oslo, Norway
Valeriy Zakamulin: Department of Economics and Finance, University of Agder, Service Box 422, 4604 Kristiansand, Norway

International Journal of Theoretical and Applied Finance (IJTAF), 2014, vol. 17, issue 02, 1-27

Abstract: In this paper, we present a multi-factor continuous-time autoregressive moving-average (CARMA) model for the short and forward interest rates. This model is able to present an adequate statistical description of the short and forward rate dynamics. We show that this is a tractable term structure model and provides closed-form solutions to bond prices, yields, bond option prices, and the term structure of forward rate volatility. We demonstrate the capabilities of our model by calibrating it to a panel of spot rates and the empirical volatility of forward rates simultaneously, making the model consistent with both the spot rate dynamics and forward rate volatility structure.

Keywords: Interest rate model; short rate; forward rate; term structure; CARMA process; bond pricing; bond option pricing; yield curve; volatility curve; calibration (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024914500083
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:wsi:ijtafx:v:17:y:2014:i:02:n:s0219024914500083

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024914500083

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().