Continuous and Discrete Time Modeling of Short-Term Interest Rates

Chih-Ying Hsiao and Willi Semmler

Chapter 9 in Financial Econometrics Modeling: Derivatives Pricing, Hedge Funds and Term Structure Models, 2011, pp 163-187 from Palgrave Macmillan

Abstract: Abstract In modern finance theory, the short-term interest rate is important in characterizing the term structure of interest rates and in pricing interest-rate-contingent-claims. There is some pioneering work in the continuous-time framework, for example by Vasicek (1997) and Cox et al. (1985). A survey of is provided by Chan et al. (1992). Chan et al. (1992) show that a wide variety of well-known one-factor models for short rates can be nested within the following stochastic different equation (SDE): (9.1) d X t = ( c − β X t ) d t + σ X t γ d W t . $$d{{X}_{t}}=\left( {c-\beta {{X}_{t}}} \right)dt+\sigma X_{t}^{\gamma }d{{W}_{t}}.$$

Keywords: Interest Rate; Forecast Error; Stochastic Volatility Model; Short Rate; Term Structure Model (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-29520-9_9

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DOI: 10.1057/9780230295209_9

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