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Fundamental Properties of Bond Prices in Models of the Short-Term Rate

Antonio Mele

No 460, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: This paper develops restrictions that arbitrage-constrained bond prices impose on the short-term rate process in order to be consistent with given dynamic properties of the term-structure of interest rates. The central focus is the relationship between bond prices and the short-term rate volatility. In both scalar and multidimensional diffusion settings, typical relationships between bond prices and volatility are generated by joint restrictions on the risk-neutralized drift functions of the state variables and convexity of bond prices with respect to the short-term rate. The theory is illustrated by several examples and is partially extended to accommodate the occurrence of jumps and default.

JEL-codes: C61 G12 G13 (search for similar items in EconPapers)
Date: 2002-06-01
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Fundamental Properties of Bond Prices in Models of the Short-Term Rate (2003) Downloads
Working Paper: Fundamental Properties of Bond Prices in Models of the Short-Term Rate (2000) Downloads
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