2004 | OriginalPaper | Buchkapitel
The Black and Karasinski Model
verfasst von : Simona Svoboda
Erschienen in: Interest Rate Modelling
Verlag: Palgrave Macmillan UK
Enthalten in: Professional Book Archive
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The discrete time Black, Derman and Toy model [6], discussed in Chapter 8, makes provision for two time-dependent factors: the mean short-term interest rate and the short-term interest rate volatility. The continuous time equivalent of the model clearly shows that the rate of mean reversion is a function of the volatility. This is equivalent to future short-term interest rate volatilities being fully determined by the observed volatility term structure. This dependence makes it impossible to specify these two factors independently.