A Vasicek-Type Short Rate Model With Memory Effect |
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Authors: | Akihiko Inoue Shingo Moriuchi Yusuke Nakamura |
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Institution: | 1. Department of Mathematics, Hiroshima University, Higashi-Hiroshima, Japan;2. Bizen-Ryokuyou High School, Bizenshi, Japan |
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Abstract: | We introduce a Vasicek-type short rate model which has two additional parameters representing memory effect. This model presents better results in yield curve fitting than the classical Vasicek model. We derive closed-form expressions for the prices of bonds and bond options. Although the model is non-Markov, there exists an associated Markov process that allows one to apply usual numerical methods to the model. We derive analogs of an affine term structure and term structure equations for the model, and, using them, we present a numerical method to evaluate contingent claims. |
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Keywords: | Short rate Vasicek-type model Yield curve Affine term structure Term structure equation |
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