Abstract
We consider the effect on zero-coupon bond price and option valuation when a short rate model has non-Gaussian dependent innovations. Higher-order asymptotic theory enables approximate bond price formula and zero-coupon bond option price formula to be obtained. Some numerical examples are presented, where the process of innovation follows a particular model. These examples indicate that non-Gaussianity and dependence of innovations have a great influence on both zero-coupon bond price and option valuation.
| Original language | English |
|---|---|
| Title of host publication | Interest Rates |
| Subtitle of host publication | Term Structure Models, Monetary Policy, and Prediction |
| Publisher | Nova Science Publishers, Inc. |
| Pages | 19-61 |
| Number of pages | 43 |
| ISBN (Print) | 9781613247204 |
| Publication status | Published - 2013 Jan 1 |
Keywords
- Bond option
- Edgeworth expansion
- Short rates
- Vasicek model
- Zero-coupon bond pricing
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Social Sciences(all)