An empirical comparison of forward-rate and spot-rate models for valuing interest-rate options
Article Abstract:
Research based on data from the German market for interest-rate warrants from 1990 to 1993 provides empirical evidence about whether spot- or forward-rate models are more suitable for supporting the measurement, control and supervision of interest-rate risk. It has been shown that the one-factor forward rate model with linear proportional volatility and the two spot-rate models with two factors perform much better than the other four models for this period. In particular, the one-factor forward-rate model with linear proportional volatility and the two-factor spot-rate model with stochastic volatility perform very well.
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1999
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Transition densities for interest rate and other nonlinear diffusions
Article Abstract:
This paper applies to interest rate models the theoretical method developed in Ait-Sahalia (1998) to generate accurate closed-form approximations to the transition function of an arbitrary diffusion. While the main focus of this paper is on the maximum-likelihood estimation of interest rate models with otherwise unknown transition functions, applications to the valuation of derivative securities are also briefly discussed. (Reprinted by permission of the publisher.)
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1999
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