A Simple Model of the Nominal Term Structure of Interest Rates

Yougsoo Choi and Tony Wirjanto ()
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Yougsoo Choi: Department of Mathematics, Hankuk University of Foreign Studies, Korea

No 8011, Working Papers from University of Waterloo, Department of Economics

Abstract: This paper presents a simple two-factor model of nominal term structure of interest rates, in which the log-price kernel has an autoregressive drift process and a nonlinear GARCH volatility process. With these two state-variable processes, closed-form solutions are derived for zero-coupon bond prices as well as yield to maturity for a given time to maturity.

Date: 2008-12
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