IJPAM: Volume 19, No. 4 (2005)

ON A STOCHASTIC INTEREST RATE
MODEL FOR BONDS

J. Villarroel
Faculty of Sciences
University of Salamanca
Plaza Merced, Salamanca, 37008, SPAIN
e-mail: javier@usal.es


Abstract.Assuming a certain stochastic evolution of the interest rate $B_t$ we consider the problem of how to prize a security whose payoff at maturity time $T$ is a function which depends only on $B_T$. We show how to generalize the theory of Cox et al [#!1!#] to a situation with time dependent coefficients and arbitrary payoff. The solution to this problem is given in terms of ``killed" Brownian motion.

Received: February 28, 2005

AMS Subject Classification: 60H10, 60J60

Key Words and Phrases: stochastic differential equations, bond pricing

Source: International Journal of Pure and Applied Mathematics
ISSN: 1311-8080
Year: 2005
Volume: 19
Issue: 4