Approximating the zero-coupon bond price in a general one-factor model with constant coefficients

2014/08/25 by Beata Stehlikova, Stehlikova, Beata
Economics, Econometrics and Finance · #Computational Finance (q-fin.CP) #FOS: Economics and business #q-fin.CP

paper · pdf · doi:10.48550/arxiv.1408.5673

arxiv created 2014/08/25 · arxiv updated 2014/08/26

Abstract

We consider a general one-factor short rate model, in which the instantaneous interest rate is driven by a univariate diffusion with time independent drift and volatility. We construct recursive formula for the coefficients of the Taylor expansion of the bond price and its logarithm around τ=0, where τ is time to maturity. We provide numerical examples of convergence of the partial sums of the series and compare them with the known exact values in the case of Cox-Ingersoll-Ross and Dothan model.

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