Discrete-Time Models of Bond Pricing
David Backus, Silverio Foresi, Chris Telmer
NBER Working Paper No. 6736
We explore a variety of models and approaches to bond pricing, including those associated with Vasicek, Cox-Ingersoll-Ross, Ho and Lee, and Heath-Jarrow-Morton, as well as models with jumps, multiple factors, and stochastic volatility. We describe each model in a common theoretical framework and explain the reasoning underlying the choice of parameter values. Our framework has continuous state variables but discrete time, which we regard as a convenient middle ground between the stochastic calculus of high theory and the binomial models of classroom fame. In this setting, most of the models we examine are easily implemented on a spreadsheet.
Published: Jegadeesh, N. and B. Tuckman (eds.) Advanced Fixed Income Valuation Tools. Wiley, 2000.
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