A Vasicek-type short rate model with memory effect

DOI10.1080/07362994.2015.1087864MaRDI QIDQ3459230zbMATH OpenOpenAlexFDO

Authors Akihiko Inoue, Shingo Moriuchi, Yusuke Nakamura

Publication date 21 December 2015

Published in Stochastic Analysis and Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1504.01542

zbMATH Keywords

affine term structurestochastic differential equationterm structure equationVasicek-type short rate modelyield curve

Mathematics Subject Classification ID

Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Numerical solutions to stochastic differential and integral equations (65C30) Derivative securities (option pricing, hedging, etc.) (91G20) Interest rates, asset pricing, etc. (stochastic models) (91G30) Financial applications of other theories (91G80)

Abstract: We introduce a Vasicek-type short rate model which has two additional parameters representing memory effect. This model presents better results in yield curve fitting than the classical Vasicek model. We derive closed-form expressions for the prices of bonds and bond options. Though the model is non-Markov, there exists an associated Markov process which allows one to apply usual numerical methods to the model. We derive analogs of an affine term structure and term structure equations for the model, and, using them, we present a numerical method to evaluate contingent claims.

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Cites work

• A YIELD‐FACTOR MODEL OF INTEREST RATES
• An equilibrium characterization of the term structure
• Diffusion-type models with given marginal distribution and autocorrelation function
• Financial Markets with Memory I: Dynamic Models
• Financial Markets with Memory II: Innovation Processes and Expected Utility Maximization
• scientific article; zbMATH DE number 1869203 (Why is no real title available?)
• Multi-factor term structure models
• Term-structure models. A graduate course
• The Pearson Diffusions: A Class of Statistically Tractable Diffusion Processes

Cited in

(6)

• Yield curve shapes of Vašíček interest rate models, measure transformations and an application for the simulation of pension products
• A short memory version of the Vasicek model and evaluating European options on zero-coupon bonds
• Estimating the Short Rate from the Term Structures in the Vasicek Model
• A generalized Vasicek-Malkiel bond pricing model
• Representation theorems in finite prediction, with applications
• Interest rate modeling with generalized Langevin equations

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