On a General Class of One-Factor Models for the Term Structure of Interest Rates

Download or read book On a General Class of One-Factor Models for the Term Structure of Interest Rates written by Wolfgang M. Schmidt and published by . This book was released on 1997 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a general one-factor model for the term structure of interest rates which is based upon a model for the short rate. The dynamics of the short rate is described by an appropriate function of a time changed Wiener process. The model allows for perfect fitting of given term structure of interest rates and volatilities, as well as for mean reversion. Moreover, every type of distribution of the short rate can be achieved, in particular, the distribution can be concentrated on an interval. The model includes several popular models such as the generalized Vasicek (or Hull- White) model, the Black-Derman-Toy, Black-Karasinski model, and others. There is a unified numerical approach to the general model based on a simple lattice approximation which, in particular, can be chosen as a binomial or N-nomial lattice with branching probabilities 1/N.