Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099183 | Journal of Economic Dynamics and Control | 2009 | 13 Pages |
Abstract
We propose an analytical approximation of the term structure of interest rates under general diffusion processes of the short-rate and state variables. A method of approximating conditional moments as the solution to a system of ordinary differential equations is applied to the pricing of bonds. Numerical experiments based on two illustrative models show that the second-order approximation is accurate for maturities of up to five years and the third-order approximation is effective for longer maturities. We also show the possibility of improving the second-order approximation without much increasing the computational burden.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Hideyuki Takamizawa, Isao Shoji,