Perturbation analysis of a nonlinear equation arising in the Schaefer-Schwartz model of interest rates

DOI10.1515/MS-2017-0129zbMATH Open1441.91081arXiv1410.6321OpenAlexW2963110388WikidataQ129782459 ScholiaQ129782459MaRDI QIDQ4643587FDOQ4643587

Authors: Beáta Stehlíková 

Publication date: 24 May 2018

Published in: Mathematica Slovaca (Search for Journal in Brave)

Abstract: We deal with the interest rate model proposed by Schaefer and Schwartz, which models the long rate and the spread, defined as the difference between the short and the long rates. The approximate analytical formula for the bond prices suggested by the authors requires a computation of a certain constant, defined via a nonlinear equation and an integral of a solution to a system of ordinary differential equations. In this paper we use perturbation methods to compute this constant. Coefficients of its expansion are given in a closed form and can be constructed to arbitrary order. However, our numerical results show that a very good accuracy is achieved already after using a small number of terms.

Full work available at URL: https://arxiv.org/abs/1410.6321

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zbMATH Keywords

asymptotic expansionnonlinear equationinterest rate spreadinterest rates modelbond pricelong-term rate

Mathematics Subject Classification ID

Ordinary differential equations and systems with randomness (34F05) Applications of stochastic analysis (to PDEs, etc.) (60H30) Interest rates, asset pricing, etc. (stochastic models) (91G30) Asymptotic expansions of solutions to ordinary differential equations (34E05) Numerical computation of solutions to single equations (65H05)

Cites Work

• An effective approximation for zero-coupon bonds and Arrow-Debreu prices in the Black-Karasinski model

Cited In (2)

• Numerical simulation of a strongly nonlinear Ait-Sahalia-type interest rate model
• Perturbation solutions for bond-pricing equations under a multivariate CIR model with weak dependences

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