A Simple Model of the Nominal Term Structure of Interest Rates

20 Pages Posted: 27 Mar 2013

See all articles by Youngsoo Choi

Youngsoo Choi

Hankuk University of Foreign Studies

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Date Written: March 26, 2013

Abstract

This paper proposes a simple two-factor model of nominal term structure of interest rates, in which the log-price kernel has an autoregressive drift process and a nonlinear GARCH volatility process. Given these two state-variable processes, closed-form expressions are derived for the zero-coupon bond prices and the yield to maturity for a given time to maturity.

Keywords: interest rates, drift, AR, volatility, NGARCH, zero-coupon bond price, yield to maturity

JEL Classification: E43, G13, G21

Suggested Citation

Choi, Youngsoo and Wirjanto, Tony S., A Simple Model of the Nominal Term Structure of Interest Rates (March 26, 2013). Available at SSRN: https://ssrn.com/abstract=2240019 or http://dx.doi.org/10.2139/ssrn.2240019

Youngsoo Choi

Hankuk University of Foreign Studies ( email )

89 Wangsan-ri, Mohyeon-myeon, Cheoin-gu
Yongin-shi, Kyonggi-do 449-791
Korea, Republic of (South Korea)

Tony S. Wirjanto (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)

HOME PAGE: http://https://uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

University of Waterloo, Department of Statistics & Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)
519-746-1875 (Fax)

HOME PAGE: http://math.uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

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