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@article{ Lemke2008, title = {Bond Pricing when the Short-Term Interest Rate Follows a Threshold Process}, author = {Lemke, Wolfgang and Archontakis, Theofanis}, journal = {Quantitative Finance}, number = {8}, pages = {811-822}, volume = {8}, year = {2008}, doi = {https://doi.org/10.1080/14697680701691451}, urn = {https://nbn-resolving.org/urn:nbn:de:0168-ssoar-221143}, 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 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.}, }