Abstract. For an interest rate model to predict future rates, it is highly desirable that it has embedded in it the current term structure of interest rates known in the market. For the general four-parameter interest rates model incorporating the current yield into the model seems intractable. In the present paper we consider a first order approximation, valid for large time to maturity, to fit the current yield curve into the model. The resulting interest rate model is described which includes, as a particular case, the well-known interest rate model of Vasicek [11].

Received: February 2, 2016

AMS Subject Classification: 91B24, 91B28, 91B30

Key Words and Phrases: short rate models, interest rate models, general four-parameter model, yield curve, term structure of interest rates, Vasicek model

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DOI: 10.12732/ijpam.v107i1.10 How to cite this paper?

Source: International Journal of Pure and Applied Mathematics
ISSN printed version: 1311-8080
ISSN on-line version: 1314-3395
Year: 2016
Volume: 107
Issue: 1
Pages: 129 - 138

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This work is licensed under the Creative Commons Attribution International License (CC BY).

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