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Published in:
2015 | OriginalPaper | Chapter
24. Interest Rate Derivatives: Multi-Factor Models
Authors : Carl Chiarella, Xue-Zhong He, Christina Sklibosios Nikitopoulos
Published in: Derivative Security Pricing
Publisher: Springer Berlin Heidelberg
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Abstract
In this chapter we develop a framework for term structure modelling that allows factors other than the instantaneous spot rate itself to influence the evolution of the term structure of interest rates. The framework allows for multi-factor generalisations of the Hull–White model as well as of the CIR model. First we present a two-factor extension of the Hull–White model. Then we develop a general multi-factor term structure model and the corresponding bond option pricing model. Finally as a specific application, we consider the so called Duffie–Kan affine class of term structure models, which is widely applied in practice.