POLYNOMIAL TERM STRUCTURE MODELS

Si Cheng () and Michael R. Tehranchi
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Si Cheng: Statistical Laboratory, Centre for Mathematical Sciences, University of Cambridge, Wilberforce Road, Cambridge CB3 0WB, UK
Michael R. Tehranchi: Statistical Laboratory, Centre for Mathematical Sciences, University of Cambridge, Wilberforce Road, Cambridge CB3 0WB, UK

International Journal of Theoretical and Applied Finance (IJTAF), 2021, vol. 24, issue 02, 1-28

Abstract: In this paper, we explore a class of tractable interest rate models that have the property that the price of a zero-coupon bond can be expressed as a polynomial of a state diffusion process. Our results include a classification of all such time-homogeneous single-factor models in the spirit of Filipović’s maximal degree theorem for exponential polynomial models, as well as an explicit characterization of the set of feasible parameters in the case when the factor process is bounded. Extensions to time-inhomogeneous and multi-factor polynomial models are also considered.

Keywords: Term structure; interest rates; polynomial models (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0219024921500096

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