A short term interest rate model (Q1297923)

The short term interest rate plays a prominent role in many areas of finance. The modelling of its dynamics represents a difficult and challenging problem. A large number of different interest rate term structure models have been considered in the literature. The survey by \textit{T. Björk} [Lect. Notes Math. 1656, 53--122 (1997; Zbl 0904.90007)] provides a recent overview of this topic. The aim of this paper is to suggest a new and possibly more realistic short term interest rate model. It incorporates the inflation rate, market variance, market net growth rate and market volatility trend. The model links the short rate with other market factors and provides a good fit to empirical data for several developed markets.