An Alternative Interest Rate Term Structure Model

Eckhard Platen ()

No 97, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This paper proposes analternative approach to the modeling of the interest rate term structure. It suggests that the total market price for risk is an important factor that has to be modeled carefully. The growth optimal portfolio, which is characterized by this factor, is used as refernce unit or benchmark for obtaining a consistent price system. Benchmarked derivative prices are taken as conditional expectations of future benchmarked prices under the real world probability measure. The inverse of the squared total market price for risk is modeled as a square root process and shown to influence the medium and long term forward rates. With constant parameters and constant short rate the model already generates a hump shaped mean of the forward rate curve and other empirical features typically observed.

Keywords: interest rate term structure; growth optimal portfolio; fair pricing; total market price for risk; square root process (search for similar items in EconPapers)
JEL-codes: G10 G13 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2003-06-01
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published as: PLaten, E., 2005, "An Alternative Interest Rate Term Structure Model", International Journal of Theoretical and Applied Finance, 8(6), 717-735.

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Related works:
Journal Article: AN ALTERNATIVE INTEREST RATE TERM STRUCTURE MODEL (2005)
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