Term Structure Equations Under Benchmark Framework

Yassine El Qalli ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper makes use of an integrated benchmark modeling framework that allows us to derive term structure equations for bond and forward prices. The benchmark or numeraire is chosen to be the growth optimal portfolio (GOP). For deterministic short rate the solution of the bond term structure equation coincides with the explicit formula obtained in Platen(2005). The resulting term structure equations are used to explain moves in bond and forward prices by introducing GOP as a factor and therefore constructing a hedge portfolio for bond consisting of units of the GOP and the saving account. The paper also derives an affine term structure equation for forward price in term of the GOP factor. In the case of stochastic short rate we restrict our selves to give only a term structure equation for the bond price.

Keywords: Term structure; Benchmark approach; GOP; Forward price; bond. (search for similar items in EconPapers)
JEL-codes: E43 G13 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-mac
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Related works:
Working Paper: Term Structure Equations Under Benchmark Framework (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:15667

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