On the singular limit of solutions to the CIR interest rate model with stochastic volatility

B. Stehlikova and Daniel Sevcovic

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Abstract: In this paper we are interested in term structure models for pricing zero coupon bonds under rapidly oscillating stochastic volatility. We analyze solutions to the generalized Cox-Ingersoll-Ross two factors model describing clustering of interest rate volatilities. The main goal is to derive an asymptotic expansion of the bond price with respect to a singular parameter representing the fast scale for the stochastic volatility process. We derive the second order asymptotic expansion of a solution to the two factors generalized CIR model and we show that the first two terms in the expansion are independent of the variable representing stochastic volatility.

Date: 2008-11
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:0811.0591

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