El Qalli, Yassine (2009): Term Structure Equations Under Benchmark Framework.
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This paper makes use of an integrated benchmark modeling framework that allows us to derive term structure equations for bond and forward prices. The benchmark or numeraire is chosen to be the growth optimal portfolio (GOP). For deterministic short rate the solution of the bond term structure equation coincides with the explicit formula obtained in Platen(2005). The resulting term structure equations are used to explain moves in bond and forward prices by introducing GOP as a factor and therefore constructing a hedge portfolio for bond consisting of units of the GOP and the saving account. The paper also derives an affine term structure equation for forward price in term of the GOP factor. In the case of stochastic short rate we restrict our selves to give only a term structure equation for the bond price.
|Item Type:||MPRA Paper|
|Original Title:||Term Structure Equations Under Benchmark Framework|
|Keywords:||Term structure, Benchmark approach, GOP, Forward price, bond.|
|Subjects:||E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects
G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing
|Depositing User:||EL QALLI|
|Date Deposited:||12. Jun 2009 03:43|
|Last Modified:||16. Feb 2013 02:22|
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