The Art of Term Structure Models: Volatility and Distribution
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About the Lecture
The lecture The Art of Term Structure Models: Volatility and Distribution by Edu Pristine is from the course Archiv - Market Risks. It contains the following chapters:
- Short term Interest Models
- Effectiveness of time Dependent Models
- Cox Ingersoll Ross Model & Lognormal Models
- Volatility in CIR & Lognormal models
- Normal vs CIR vs Lognormal Distributions
- Lognormal Distribution with Drift
- Black Karazinski Model
Author of lecture The Art of Term Structure Models: Volatility and Distribution
Edu Pristine
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Excerpts from the accompanying material
... reverting drift but with constant volatility. During macroeconomic downturns volatility increases suddenly and homoscedastic models calibrated under normal market conditions fail. To incorporate varying volatility, we assume volatility to be time dependent as well dr = (t)dt ...
... decay rate in this model is same as the mean reversion rate in Vasicek model and rest all parameters being the same, the terminal distributions using both these models will be the same. In case the time dependent drift in this distribution is same as average interest rate ...
... must depend on the current rates. Volatility levels will be high when interest rates are very high since we expect large changes when prevailing market interest rates are high whereas we expect low volatility levels when prevailing markets rats are low. As interest rates approach zero, volatility will sharply ...
... Distributions Terminal distribution of the short rate. Lognormal & CIR terminal distributions are right ...
... short rate to be time dependent. Very flexible since allows time dependent volatility and mean reversion, d(ln(r)) = k(t)[ ln(?(t)) – ln(r )]dt +?(t) dw. Natural log of short term rate ...
... mean reversion adjustment. ...
