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

BE ́ATA STEHL ́IKOV ́A

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

Published online: 2013-04

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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.
  • AMS Subject Headings

91B28 35K15

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COPYRIGHT: © Global Science Press

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@Article{IJNAMB-4-224, author = {BE ́ATA STEHL ́IKOV ́A}, title = {A Simple Analytic Approximation Formula for the Bond Price in the Chan-Karolyi-Longstaff-Sanders Mod}, journal = {International Journal of Numerical Analysis Modeling Series B}, year = {2013}, volume = {4}, number = {3}, pages = {224--234}, 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.}, issn = {}, doi = {https://doi.org/}, url = {http://global-sci.org/intro/article_detail/ijnamb/255.html} }
TY - JOUR T1 - A Simple Analytic Approximation Formula for the Bond Price in the Chan-Karolyi-Longstaff-Sanders Mod AU - BE ́ATA STEHL ́IKOV ́A JO - International Journal of Numerical Analysis Modeling Series B VL - 3 SP - 224 EP - 234 PY - 2013 DA - 2013/04 SN - 4 DO - http://doi.org/ UR - https://global-sci.org/intro/article_detail/ijnamb/255.html KW - one-factor interest rate model KW - Vasicek model KW - bond price KW - analytical approximation formula KW - order of accuracy KW - calibration AB - 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.
BE ́ATA STEHL ́IKOV ́A. (2013). A Simple Analytic Approximation Formula for the Bond Price in the Chan-Karolyi-Longstaff-Sanders Mod. International Journal of Numerical Analysis Modeling Series B. 4 (3). 224-234. doi:
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