An Integrated Model for the Term and Volatility Structures of Interest Rates
Posted: 25 May 1998
Date Written: Undated
In this paper, we present a model for the term structure of interest rates, which integrates the existing multifactor and time dependent approaches of term structure models. This integrated model uses the time series data so that it has macroeconomic implications such as interest rate volatility and mean reversion. It also uses the cross sectional data so that it fits the yield curve and the volatility curve. In contrast to other multifactor time dependent models, this model is easy to implement. It has closed form solutions for discount bonds as well as their European claims. For American claims, the lattice model can be constructed as easily as a fixed parameter model. The fitting of the volatility curve and the fitting of the yield curve are separable in the model. The capability of combining both time series and cross sectional information in a computationally tractable framework is the main contribution of this model.
JEL Classification: E43, G12, G13
Suggested Citation: Suggested Citation