Quadratic term structure models in discrete time

M. Realdon

doi:10.1016/j.frl.2006.06.001

Quadratic term structure models in discrete time

M. Realdon

Economics

Research output: Contribution to journal › Article › peer-review

Abstract

This paper extends the results on quadratic term structure models in continuous time to the discrete time setting. The continuous time setting can be seen as a special case of the discrete time one. Discrete time quadratic models have advantages over their continuous time counterparts as well as over discrete time affine models. Recursive closed form solutions for zero coupon bonds are provided even in the presence of multiple correlated underlying factors, time-dependent parameters, regime changes and “jumps” in the underlying factors. In particular regime changes and “jumps” cannot so easily be accommodated in continuous time quadratic models. Pricing bond options requires simple integration and model estimation does not require a restrictive choice of the market price of risk.

Original language	English
Pages (from-to)	277-289
Number of pages	12
Journal	Finance Research Letters
Volume	3
Issue number	4
DOIs	https://doi.org/10.1016/j.frl.2006.06.001
Publication status	Published - Dec 2006

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10.1016/j.frl.2006.06.001

http://dx.doi.org/10.1016/j.frl.2006.06.001

Cite this

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title = "Quadratic term structure models in discrete time",

abstract = "This paper extends the results on quadratic term structure models in continuous time to the discrete time setting. The continuous time setting can be seen as a special case of the discrete time one. Discrete time quadratic models have advantages over their continuous time counterparts as well as over discrete time affine models. Recursive closed form solutions for zero coupon bonds are provided even in the presence of multiple correlated underlying factors, time-dependent parameters, regime changes and “jumps” in the underlying factors. In particular regime changes and “jumps” cannot so easily be accommodated in continuous time quadratic models. Pricing bond options requires simple integration and model estimation does not require a restrictive choice of the market price of risk.",

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AB - This paper extends the results on quadratic term structure models in continuous time to the discrete time setting. The continuous time setting can be seen as a special case of the discrete time one. Discrete time quadratic models have advantages over their continuous time counterparts as well as over discrete time affine models. Recursive closed form solutions for zero coupon bonds are provided even in the presence of multiple correlated underlying factors, time-dependent parameters, regime changes and “jumps” in the underlying factors. In particular regime changes and “jumps” cannot so easily be accommodated in continuous time quadratic models. Pricing bond options requires simple integration and model estimation does not require a restrictive choice of the market price of risk.

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DO - 10.1016/j.frl.2006.06.001

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