Chapter

Short Rate Models

Tomas Björk

in Arbitrage Theory in Continuous Time

Second edition

Published in print March 2004 | ISBN: 9780199271269
Published online October 2005 | e-ISBN: 9780191602849 | DOI: http://dx.doi.org/10.1093/0199271267.003.0021

Series: Oxford Finance Series

Short Rate Models

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This chapter examines the problem of how to model an arbitrage free family of zero coupon bond price processes. It assumes a market for T-bonds for every choice of T, and that the market is arbitrage free. For every T, the price of a T-bond has the form p (t, T) = F (t, r, (t) ; T), where F is a smooth function of three real variables. Practice exercises are included.

Keywords: zero coupon bond; price; arbitrage short rate models; bond market; interest

Chapter.  4623 words. 

Subjects: Financial Markets

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