Convexity theory for the term structure equation
2008 (English)In: Finance and Stochastics, ISSN 0949-2984, E-ISSN 1432-1122, Vol. 12, no 1, 117-147 p.Article in journal (Refereed) Published
We study the convexity and model parameter monotonicity properties for prices of bonds and bond options when the short rate is modeled by a diffusion process. We provide sharp conditions on the model parameters under which the convexity of the price in the short rate is guaranteed. Under these conditions, the price is decreasing in the drift and increasing in the volatility of the short rate. We also study the convexity properties of the logarithm of the price and find simple conditions on the coefficients that guarantee that the price is log-convex or log-concave.
Place, publisher, year, edition, pages
2008. Vol. 12, no 1, 117-147 p.
Affine term structure, Bond options, Convexity, Interest rate theory, Log-concavity, Log-convexity, Parameter monotonicity
Mathematics Economics and Business
IdentifiersURN: urn:nbn:se:uu:diva-14342DOI: 10.1007/s00780-007-0055-3ISI: 000251151700005OAI: oai:DiVA.org:uu-14342DiVA: diva2:42112