Chapter

Martingale Models for the Short Rate

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/10.1093/0199271267.003.0022

Series: Oxford Finance Series

Martingale Models for the Short Rate

Show Summary Details

Preview

This chapter analyses the martingale modelling approach for the short rate of interest rate model. It considers an interest rate model where the P-dynamics of the short rate of interest are given by d r (t) = μ (t, r (t)) dt + σ (t, r(t)) d W-. The term structure (i.e., the family of bond price processes), as well as the prices of all other interest rate derivatives are determined by specifying the r-dynamics under the martingale measure Q, a procedure known as martingale modelling. Practice exercises are included.

Keywords: martingale modelling; short rate; interest rate model; yield; price

Chapter.  6584 words. 

Subjects: Financial Markets

Full text: subscription required

How to subscribe Recommend to my Librarian

Buy this work at Oxford University Press »

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.