Quadratic term structure models in discrete time


Realdon, Marco (2006) Quadratic term structure models in discrete time. Finance Research Letters, 3, (4), 277-289. (doi:10.1016/j.frl.2006.06.001).

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Description/Abstract

This paper extends the results on quadratic term structure models in continuous time to the discrete time setting. The continuous time setting can be seen as a special case of the discrete time one. Discrete time quadratic models have advantages over their continuous time counterparts as well as over discrete time affine models. Recursive closed form solutions for zero coupon bonds are provided even in the presence of multiple correlated underlying factors, time-dependent parameters, regime changes and “jumps” in the underlying factors. In particular regime changes and “jumps” cannot so easily be accommodated in continuous time quadratic models. Pricing bond options requires simple integration and model estimation does not require a restrictive choice of the market price of risk

Item Type: Article
Additional Information:
ISSNs: 1544-6123 (print)
Related URLs:
Keywords: quadratic term structure model, discrete time, bond valuation, regime change, jumps, bond option
Subjects: H Social Sciences > HG Finance
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Divisions: University Structure - Pre August 2011 > School of Management
ePrint ID: 45614
Date Deposited: 18 Apr 2007
Last Modified: 27 Mar 2014 18:29
URI: http://eprints.soton.ac.uk/id/eprint/45614

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