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Application and Model of Term Structure of Stochastic Interest Rate Based on the Inflation Rate.

Authors :
Yonghong Ma
Rongxi Zhou
Zhenguang Li
Source :
Journal of Systems Science & Information; Jun2007, Vol. 5 Issue 2, p191-199, 9p
Publication Year :
2007

Abstract

In this paper, we build the arbitrage-free term structure model on the inflation rate, and discuss the relations between the arbitrage-free term structure and the equivalent martingale measure. The volatility terms of diffusion processes of the real forward interest rate, the nominal forward interest rate and the inflation index (Jarrow and Yildirim, 2003) are extended into many dimensional Brownian motions. Moreover, as we derive the differential equations of three-factor term structure, our results are generalized. At last, the analytic solutions of European option can be deduced on the inflation rate. [ABSTRACT FROM AUTHOR]

Details

Language :
English
ISSN :
14789906
Volume :
5
Issue :
2
Database :
Complementary Index
Journal :
Journal of Systems Science & Information
Publication Type :
Academic Journal
Accession number :
26163867