Geodesic
Convergence model of interest rates of CKLS type
Kybernetika, Tome 48 (2012) no. 3, pp. 567-586 Cet article a éte moissonné depuis la source Czech Digital Mathematics Library

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This paper deals with convergence model of interest rates, which explains the evolution of interest rate in connection with the adoption of Euro currency. Its dynamics is described by two stochastic differential equations – the domestic and the European short rate. Bond prices are then solutions to partial differential equations. For the special case with constant volatilities closed form solutions for bond prices are known. Substituting its constant volatilities by instantaneous volatilities we obtain an approximation of the solution for a more general model. We compute the order of accuracy for this approximation, propose an algorithm for calibration of the model and we test it on the simulated and real market data.
This paper deals with convergence model of interest rates, which explains the evolution of interest rate in connection with the adoption of Euro currency. Its dynamics is described by two stochastic differential equations – the domestic and the European short rate. Bond prices are then solutions to partial differential equations. For the special case with constant volatilities closed form solutions for bond prices are known. Substituting its constant volatilities by instantaneous volatilities we obtain an approximation of the solution for a more general model. We compute the order of accuracy for this approximation, propose an algorithm for calibration of the model and we test it on the simulated and real market data.
Classification : 62A10, 93E12
Keywords: convergence model of interest rate; approximate analytic solution; order of accuracy 
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}
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Zíková, Zuzana; Stehlíková, Beáta. Convergence model of interest rates of CKLS type. Kybernetika, Tome 48 (2012) no. 3, pp. 567-586. http://geodesic.mathdoc.fr/item/KYB_2012_48_3_a15/

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