Coupon Bond Valuation with a Non-Affine Discount Yield Model

Peter Spencer

Discussion Papers from Department of Economics, University of York

Abstract: I report a closed form for the Laplace transform of the Ahn Gao (RFS, 1999) discount function and show how this can be used for pricing non-zero coupon bond prices, including hybrid fixed/variable rate instruments. In contrast, numerical techniques have to be used to analyse these prices for the standard affine yield specifications. I find that many of the characteristics of the Cox Ingersoll and Ross (JF, 1980) solutions extend to this more general non-affine specification. The allowance for mean reversion in the Ahn-Gao specification means that the solutions are hypergeometric rather than power functions, but the properties of these functions are nicely established, facilitating qualitative analysis. The prices of interest rate options can be backed out of these formulae by Laplace inversion, overcoming a major problem with the original Ahn and Gao (1999) valuation approach.

Keywords: Non-affine yield curve; Bond valuation; Laplace transform (search for similar items in EconPapers)
JEL-codes: C6 E21 G11 G12 G13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-rmg
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Citations: View citations in EconPapers (3)

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