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Bond Pricing when the Short-Term Interest Rate Follows a Threshold Process
[journal article]
Abstract This paper derives analytical solutions for arbitrage-free bond yields when the short-term interest rate follows an autoregressive process with the intercept switching endogenously. This process from the SETAR family is especially suited to capture the near-unit-root behavior typically observed in ... view more
This paper derives analytical solutions for arbitrage-free bond yields when the short-term interest rate follows an autoregressive process with the intercept switching endogenously. This process from the SETAR family is especially suited to capture the near-unit-root behavior typically observed in the evolution of short-term interest rates. The derived yield functions, mapping the one-month rate into n-period yields, exhibit a convex/concave shape to the left and the right of
the threshold value, respectively; a pattern which is also found in US bond yield data. The longer the time to maturity, the more distinct the nonlinearity of the yield function becomes.... view less
Classification
Economic Statistics, Econometrics, Business Informatics
Financial Planning, Accountancy
Method
theory application
Free Keywords
Bond pricing; Term structure of interest rates; Threshold models
Document language
English
Publication Year
2008
Page/Pages
p. 811-822
Journal
Quantitative Finance, 8 (2008) 8
DOI
https://doi.org/10.1080/14697680701691451
Status
Postprint; peer reviewed
Licence
PEER Licence Agreement (applicable only to documents from PEER project)