Polynomial term structure models
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Peer-reviewed
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Authors
Cheng, Si
Tehranchi, Michael R
Abstract
In this article, we explore a class of tractable interest rate models that have the property that the price of a zero-coupon bond can be expressed as a polynomial of a state diffusion process. Our results include a classification of all such time-homogeneous single-factor models in the spirit of Filipovic's maximal degree theorem for exponential polynomial models, as well as an explicit characterisation of the set of feasible parameters in the case when the factor process is bounded. Extensions to time-inhomogeneous and multi-factor polynomial models are also considered.
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Journal Title
International Journal of Theoretical and Applied Finance
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Journal ISSN
0219-0249
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Publisher
World Scientific Publishing
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