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2008•RePEc: Research Papers in EconomicsRequires access

A Simple Model of the Nominal Term Structure of Interest Rates

Yougsoo Choi, Tony S. Wirjanto

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Abstract

This paper presents a simple two-factor model of nominal term structure of interest rates, in which the log-price kernel has an autoregressive drift process and a nonlinear GARCH volatility process. With these two state-variable processes, closed-form solutions are derived for zero-coupon bond prices as well as yield to maturity for a given time to maturity.

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This paper presents a simple two-factor model of nominal term structure of interest rates, in which the log-price kernel has an autoregressive drift process and a nonlinear GARCH volatility process. With these two state-variable processes, closed-form solutions are derived for zero-coupon bond prices as well as yield to maturity for a given time to maturity.

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Available abstract

This paper presents a simple two-factor model of nominal term structure of interest rates, in which the log-price kernel has an autoregressive drift process and a nonlinear GARCH volatility process. With these two state-variable processes, closed-form solutions are derived for zero-coupon bond prices as well as yield to maturity for a given time to maturity.

Key concepts: Autoregressive model, Yield curve, Econometrics, Interest rate, Volatility (finance), Affine term structure model, Short rate, Term (time)

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