Continuous time Ehrenfest process in term structure modelling

2010/03/29 by Alexander Kaplun, Kaplun, Alexander
Economics, Econometrics and Finance · Mathematics · #FOS: Economics and business #FOS: Mathematics #Pricing of Securities (q-fin.PR) #Probability (math.PR) #math.PR #q-fin.PR

paper · pdf · doi:10.48550/arxiv.1003.6042

20 pages, 6 figures. Submitted to Applied Probability Trust.

arxiv created 2010/03/29 · arxiv updated 2010/04/01

Abstract

In this paper, a finite-state mean-reverting model for the short-rate, based on the continuous time Ehrenfest process, will be examined. Two explicit pricing formulae for zero-coupon bonds will be derived in the general and the special symmetric cases. Its limiting relationship to the Vasicek model will be examined with some numerical results.

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