Quadratic Term Structure Models in Discrete Time

Marco Realdon

Discussion Papers from Department of Economics, University of York

Abstract: This paper extends the results on quadratic term structure models in continuos time to the discrete time setting. The continuos time setting can be seen as a special case of the discrete time one. Recursive closed form solutions for zero coupon bonds are provided even in the presence of multiple correlated underlying factors. Pricing bond options requires simple integration. Model parameters may well be time dependent without scuppering such tractability. Model estimation does not require a restrictive choice of the market price of risk. The model can also be used for pricing credit risk and is particularly useful when the factors are or depend on periodically released macroeconomic data or corporate financial reports.

Keywords: Quadratic term structure model; discrete time; bond valuation; recursive solution; bond option (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2006-01
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (12)

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Journal Article: Quadratic term structure models in discrete time (2006)
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