Approximate formulae for pricing zero-coupon bonds and their asymptotic analysis
Pricing of Securities
2008-12-02 v2 Numerical Analysis
Abstract
We analyze analytic approximation formulae for pricing zero-coupon bonds in the case when the short-term interest rate is driven by a one-factor mean-reverting process with a volatility nonlinearly depending on the interest rate itself. We derive the order of accuracy of the analytical approximation due to Choi and Wirjanto. We furthermore give an explicit formula for a higher order approximation and we test both approximations numerically for a class of one-factor interest rate models.
Cite
@article{arxiv.0802.3039,
title = {Approximate formulae for pricing zero-coupon bonds and their asymptotic analysis},
author = {Beata Stehlikova and Daniel Sevcovic},
journal= {arXiv preprint arXiv:0802.3039},
year = {2008}
}
Comments
to appear in: International Journal of Numerical Analysis and Modeling