Taking Positive Interest Rates Seriously

Enlin Pan and Liuren Wu
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Enlin Pan: Chicago Partners, LLC

Finance from University Library of Munich, Germany

Abstract: We present a dynamic term structure model in which interest rates of all maturities are bounded from below at zero. Positivity and continuity, combined with no arbitrage, result in only one functional form for the term structure with three sources of risk. One dynamic factor controls the level of the interest rate and follows a special two-parameter square-root process under the risk-neutral measure. The two parameters of the process determine the other two sources of risk and act as two static factors. This model has no other parameters to estimate and hence bears no other risks.

Keywords: Term structure; consistency; positivity; quadratic forms (search for similar items in EconPapers)
JEL-codes: E43 G12 G13 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2004-09-07
New Economics Papers: this item is included in nep-fmk
Note: Type of Document - pdf; pages: 41
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0409013

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