Bond Pricing when the Short-Term Interest Rate Follows a Threshold Process
Abstract: This paper derives analytical solutions for arbitrage-free bond yields when the short-term interest rate follows an autoregressive process with the intercept switching endogenously. This process from the SETAR family is especially suited to capture the near-unit-root behavior typically observed in the evolution of short-term interest rates. The derived yield functions, mapping the one-month rate into n-period yields, exhibit a convex/concave shape to the left and the right of the threshold value, respectively; a pattern which is also found in US bond yield data. The longer the time to maturity, the more distinct the nonlinearity of the yield function becomes
- Location
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Deutsche Nationalbibliothek Frankfurt am Main
- Extent
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Online-Ressource
- Language
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Englisch
- Notes
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Postprint
begutachtet (peer reviewed)
In: Quantitative Finance ; 8 (2008) 8 ; 811-822
- Classification
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Wirtschaft
- DOI
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10.1080/14697680701691451
- URN
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urn:nbn:de:0168-ssoar-221143
- Rights
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Open Access unbekannt; Open Access; Der Zugriff auf das Objekt ist unbeschränkt möglich.
- Last update
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25.03.2025, 1:47 PM CET
Data provider
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Associated
- Lemke, Wolfgang
- Archontakis, Theofanis
Time of origin
- 2008
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