A Nonlinear Non-probabilistic Spot Interest Rate Model

David Epstein and Paul Wilmott

OFRC Working Papers Series from Oxford Financial Research Centre

Abstract: We show how to use 'uncertainty' in place of the more traditional Brownian 'randomness' to model a short-term interest rate. The advantage of this model is principally that it is difficult to show statistically that it is wrong. Whether the model is useful for pricing fixed-income products is less clear. We discuss the pros and cons of the model, showing how to price and hedge various contracts, saying which are easy and which are hard.

Date: 1999
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