Volume 4, Issue 3
A Simple Analytic Approximation Formula for the Bond Price in the Chan-Karolyi-Longstaff-Sanders Mod

Zichen Deng

Int. J. Numer. Anal. Mod. B, 4 (2013), pp. 224-234

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  • Abstract

We propose an analytic approximation formula 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 proportional to the power the interest rate itself. We derive its order of accuracy. Afterwards, we suggest its use in calibration and show that it can be reduced to a simple optimization problem. To test the calibration methodology, we use the simulated data from the Cox-Ingersoll- Ross model where the exact bond prices can be computed. We show that using the approximation in the calibration recovers the parameters with a high precision.

  • History

Published online: 2013-04

  • AMS Subject Headings

91B28, 35K15

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