Discontinuous Interest Rate Processes: An Equilibrium Model for Bond Option Prices

1996 ◽  
Author(s):  
Mukarram Attari
Keyword(s):  
Interest Rate ◽  
Equilibrium Model ◽  
Option Prices ◽  
Rate Processes ◽  
Bond Option

Bond valuation for generalized Langevin processes with integrated Lévy noise

2017 ◽  
Vol 18 (5) ◽  
pp. 541-563
Author(s):  
Alex Paseka ◽  
Aerambamoorthy Thavaneswaran
Keyword(s):  
Differential Equation ◽  
Parameter Estimation ◽  
Interest Rate ◽  
Option Pricing ◽  
Closed Form ◽  
Second Order ◽  
Option Prices ◽  
Interest Rate Models ◽  
Content Type ◽  
Bond Option

Purpose Recently, Stein et al. (2016) studied theoretical properties and parameter estimation of continuous time processes derived as solutions of a generalized Langevin equation (GLE). In this paper, the authors extend the model to a wider class of memory kernels and then propose a bond and bond option valuation model based on the extension of the generalized Langevin process of Stein et al. (2016). Design/methodology/approach Bond and bond option pricing based on the proposed interest rate models presents new difficulties as the standard partial differential equation method of stochastic calculus for bond pricing cannot be used directly. The authors obtain bond and bond option prices by finding the closed form expression of the conditional characteristic function of the integrated short rate process driven by a general Lévy noise. Findings The authors obtain zero-coupon default-free bond and bond option prices for short rate models driven by a variety of Lévy processes, which include Vasicek model and the short rate model obtained by solving a second-order Langevin stochastic differential equation (SDE) as special cases. Originality/value Bond and bond option pricing plays an important role in capital markets and risk management. In this paper, the authors derive closed form expressions for bond and bond option prices for a wider class of interest rate models including second-order SDE models. Closed form expressions may be especially instrumental in facilitating parameter estimation in these models.

Sticky Leverage

2016 ◽  
Vol 106 (12) ◽  
pp. 3800-3828 ◽  
Author(s):  
João Gomes ◽  
Urban Jermann ◽  
Lukas Schmid
Keyword(s):  
Interest Rate ◽  
General Equilibrium ◽  
Equilibrium Model ◽  
Debt Maturity ◽  
General Equilibrium Model ◽  
Corporate Debt ◽  
Debt Overhang ◽  
The Real ◽  
Unanticipated Inflation

We develop a tractable general equilibrium model that captures the interplay between nominal long-term corporate debt, inflation, and real aggregates. We show that unanticipated inflation changes the real burden of debt and, more significantly, leads to a debt overhang that distorts future investment and production decisions. For these effects to be both large and very persistent, it is essential that debt maturity exceeds one period. We also show that interest rate rules can help stabilize our economy. (JEL E12, E31, E44, E52, G01, G32, G35)

scholarly journals On alternative interest rate processes

1996 ◽  
Vol 20 (6) ◽  
pp. 1093-1119 ◽  
Author(s):  
Magnus Dahlquist
Keyword(s):  
Interest Rate ◽  
Rate Processes
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