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:

Series: Oxford Finance Series

Martingale Models for the Short Rate

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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

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