Journal article
Stochastic models for bond prices, function space integrals and immunization theory
Insurance, mathematics & economics, Vol.7(3), pp.163-173
1988
DOI: 10.1016/0167-6687(88)90073-X
Abstract
This article presents several diffusion models for bond prices. By considering the spot interest rate as a state variable and invoking the no-arbitrage principle, the price of a default-free and non-callable pure discount bond is represented as a conditional expectation. The Ornstein—Uhlenbeck (O.U.) stochastic process is described, and used to model the spot rate. The O.U. process is then modified to exclude negative interest rates and the resulting bond-price partial differential equation is solved. By considering the yield rate as a state variable and using the Brownian bridge process, a simpler bond price model is obtained. Applications to immunization theory are presented.
Details
- Title: Subtitle
- Stochastic models for bond prices, function space integrals and immunization theory
- Creators
- John A Beekman - Ball State UniversityElias S.W Shiu - University of Manitoba
- Resource Type
- Journal article
- Publication Details
- Insurance, mathematics & economics, Vol.7(3), pp.163-173
- Publisher
- Elsevier B.V
- DOI
- 10.1016/0167-6687(88)90073-X
- ISSN
- 0167-6687
- eISSN
- 1873-5959
- Language
- English
- Date published
- 1988
- Academic Unit
- Statistics and Actuarial Science
- Record Identifier
- 9984257618602771
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