Anda di halaman 1dari 8

CHAPTER 4

One-Factor Short-Rate Models

4.1. Vasicek Model

Definition 4.1 (Short-rate dynamics in the Vasicek model). In the Vasicek


model, the short rate is assumed to satisfy the stochastic differential equation

dr(t) = k(θ − r(t))dt + σdW (t),

where k, θ, σ > 0 and W is a Brownian motion under the risk-neutral measure.

Theorem 4.2 (Short rate in the Vasicek model). Let 0 ≤ s ≤ t ≤ T . The short
rate in the Vasicek model is given by
   t
r(t) = r(s)e−k(t−s) + θ 1 − e−k(t−s) + σ e−k(t−u) dW (u)
s

and is, conditionally on F(s), normally distributed with


 
E(r(t)|F(s)) = r(s)e−k(t−s) + θ 1 − e−k(t−s)

and
σ2  
V(r(t)|F(s)) = 1 − e−2k(t−s) .
2k

Remark 4.3 (Short rate in the Vasicek model). The short rate r(t), for each
time t, can be negative with positive probability. This is a major drawback of the
Vasicek model. On the other hand, the short rate in the Vasicek model is mean
reverting, i.e., rates revert to a long-time level, since

E(r(t)) → θ as t → ∞.

Theorem 4.4 (Zero-coupon bond in the Vasicek model). In the Vasicek model,
the price of a zero-coupon bond with maturity T at time t ∈ [0, T ] is given by

P (t, T ) = A(t, T )e−r(t)B(t,T ) ,


17
18 4. ONE-FACTOR SHORT-RATE MODELS

where
1 − e−k(T −t)
B(t, T ) =
k
and
  
σ2 σ2 2
A(t, T ) = exp θ− (B(t, T ) − T + t) − B (t, T ) .
2k 2 4k

Theorem 4.5 (Bond-price dynamics in the Vasicek model). In the Vasicek


model, the price of a zero-coupon bond with maturity T satisfies the stochastic dif-
ferential equations

dP (t, T ) = r(t)P (t, T )dt − σB(t, T )P (t, T )dW (t)

and
1 σ 2 B 2 (t, T ) − r(t) σB(t, T )
d = dt + dW (t).
P (t, T ) P (t, T ) P (t, T )

Theorem 4.6 (T -forward measure dynamics of the short rate in the Vasicek
model). Under the T -forward measure QT , the short rate r in the Vasicek model
satisfies

dr(t) = kθ − σ 2 B(t, T ) − kr(t) dt + σdW T (t),

where the QT -Brownian motion W T is defined by

dW T (t) = dW (t) + σB(t, T )dt.

Let 0 ≤ s ≤ t ≤ T . Then r is given by


 t
r(t) = r(s)e−k(t−s) + M T (s, t) + σ e−k(t−u) dW (u),
s

where
 
σ2   σ2  
M T (s, t) = θ− 2 1 − e−k(t−s) + 2 e−k(T −t) − e−k(T +t−2s) ,
k 2k

and is, conditionally on F(s), normally distributed with

ET (r(t)|F(s)) = r(s)e−k(t−s) + M T (s, t)

and
σ2  
VT (r(t)|F(s)) = 1 − e−2k(t−s) .
2k
4.1. VASICEK MODEL 19

Theorem 4.7 (Forward-rate dynamics in the Vasicek model). In the Vasicek


model, the instantaneous forward interest rate with maturity T is given by
 
σ2
f (t, T ) = θk − B(t, T ) B(t, T ) + r(t)e−k(T −t)
2
and satisfies the stochastic differential equation

df (t, T ) = σe−k(T −t) dW T (t).

Theorem 4.8 (Forward-rate dynamics in the Vasicek model). In the Vasicek


model, the simply-compounded forward interest rate for the period [T, S] satisfies
the stochastic differential equation
 
1
dF (t; T, S) = σ F (t; T, S) + (B(t, S) − B(t, T ))dW S (t).
τ (T, S)

Theorem 4.9 (Option on a zero-coupon bond in the Vasicek model). In the


Vasicek model, the price of a European call option with strike K and maturity T
and written on a zero-coupon bond with maturity S at time t ∈ [0, T ] is given by

ZBC(t, T, S, K) = P (t, S)Φ(h) − KP (t, T )Φ(h − σ̃),

where
1 − e−2k(T −t)
σ̃ = σ B(T, S)
2k
and  
1 P (t, S) σ̃
h = ln + .
σ̃ P (t, T )K 2
The price of a corresponding put option is given by

ZBP(t, T, S, K) = KP (t, T )Φ(−h + σ̃) − P (t, S)Φ(−h).

Theorem 4.10 (Caps and floors in the Vasicek model). In the Vasicek model,
the price of a cap with notional value N , cap rate K, and the set of times T , is
given by
β

Cap(t, T , N, K) = N [P (t, Ti−1 )Φ(−hi + σ̃i ) − (1 + τi K)P (t, Ti )Φ(−hi )] ,
i=α+1

while the price of a floor with notional value N , floor rate K, and the set of times
T , is given by
β

Flr(t, T , N, K) = N [(1 + τi K)P (t, Ti )Φ(hi ) − P (t, Ti−1 )Φ(hi − σ̃i )] ,
i=α+1
20 4. ONE-FACTOR SHORT-RATE MODELS

where
1 − e−2k(Ti−1 −t)
σ̃i = σ B(Ti−1 , Ti )
2k
and  
1 (1 + τi K)P (t, Ti ) σ̃i
hi = ln + .
σ̃i P (t, Ti−1 ) 2
4.2. Exponential Vasicek Model

Definition 4.11 (Exponential Vasicek model). In the exponential Vasicek


model, the short rate is given by

r(t) = ey(t) with dy(t) = k(θ − y(t))dt + σdW (t),

where k, θ, σ > 0 and W is a Brownian motion under the risk-neutral measure.

Theorem 4.12 (Short rate in the exponential Vasicek model). The short rate
in the exponential Vasicek model satisfies the stochastic differential equation
 
σ2
dr(t) = kθ + − k ln(r(t)) r(t)dt + σr(t)dW (t).
2
Let 0 ≤ s ≤ t ≤ T . Then r is given by
    t 
r(t) = exp ln(r(s))e−k(t−s) + θ 1 − e−k(t−s) + σ e−k(t−u) dW (u)
s

and is, conditionally on F(s), lognormally distributed with


   σ2  
E(r(t)|F(s)) = exp ln(r(s))e−k(t−s) + θ 1 − e−k(t−s) + 1 − e−2k(t−s)
4k
and
 
V(r(t)|F(s)) = exp 2 ln(r(s))e−k(t−s) + 2θ 1 − e−k(t−s) ×
 2    2  
σ −2k(t−s) σ −2k(t−s)
× exp 1−e exp 1−e −1 .
2k 2k
Remark 4.13 (Short rate in the exponential Vasicek model). Since the short
rate r in the exponential Vasicek model is lognormally distributed, it is always pos-
itive. A disadvantage is that P (t, T ) cannot be calculated explicitly. An advantage
of the exponential Vasicek model is that r is always mean reverting with
 
σ2
E(r(t)|F(s)) → exp θ + as t → ∞
4k
and    2 
σ2 σ
V(r(t)|F(s)) → exp 2θ + exp −1 as t → ∞.
2k 2k
4.4. COX–INGERSOLL–ROSS MODEL 21

4.3. Dothan Model

Definition 4.14 (Dothan model). In the Dothan model, the short rate is as-
sumed to satisfy the stochastic differential equation

dr(t) = ar(t)dt + σr(t)dW (t),

where σ > 0, a ∈ R, and W is a Brownian motion under the risk-neutral measure.

Theorem 4.15 (Short rate in the Dothan model). Let 0 ≤ s ≤ t ≤ T . The


short rate in the Dothan model is given by
  
σ2
r(t) = r(s) exp a− (t − s) + σ(W (t) − W (s))
2

and is, conditionally on F(s), lognormally distributed with

E(r(t)|F(s)) = r(s)ea(t−s)

and
 2 
V(r(t)|F(s)) = r2 (s)e2a(t−s) eσ (t−s) − 1 .

Remark 4.16 (Short rate in the Dothan model). Since the short rate r in the
Dothan model is lognormally distributed, it is always positive. Another advantage
is that P (t, T ) can be calculated explicitly, although the formula is not as nice and
involves the hyperbolic sine, the gamma function, and the modified Bessel function
of the second kind. A disadvantage of the Dothan model is that r is mean reverting
only iff a < 0, and then the mean reversion level is zero.

4.4. Cox–Ingersoll–Ross Model

Definition 4.17 (CIR model). In the Cox–Ingersoll–Ross model, briefly CIR


model, the short rate is assumed to satisfy the stochastic differential equation


dr(t) = k(θ − r(t))dt + σ r(t)dW (t),

where k, θ, σ > 0 with 2kθ > σ 2 and W is a Brownian motion under the risk-neutral
measure.
22 4. ONE-FACTOR SHORT-RATE MODELS

Theorem 4.18 (Short rate in the CIR model). Let 0 ≤ s ≤ t ≤ T . The short
rate in the CIR model satisfies
 
E(r(t)|F(s)) = r(s)e−k(t−s) + θ 1 − e−k(t−s)

and
σ 2 r(s)  −k(t−s)  σ2 θ  2
V(r(t)|F(s)) = e − e−2k(t−s) + 1 − e−k(t−s) .
k 2k

Remark 4.19 (Short rate in the CIR model). The prcess followed by the short
rate in the CIR model is also sometimes called a square-root process. The nice mean
reversion property in the Vasicek model is preserved in the CIR model. The bad
property of possible negativity in the Vasicek model is removed in the CIR model
by assuming 2kθ > σ 2 and hence ensuring that the origin is inaccessible to the
process. On the other hand, the distribution of the short rate in the CIR model is
neither normal nor lognormal but it possesses a noncentral chi-squared distribution.

Theorem 4.20 (Zero-coupon bond in the CIR model). In the CIR model, the
price of a zero-coupon bond with maturity T at time t ∈ [0, T ] is given by

P (t, T ) = A(t, T )e−r(t)B(t,T ) ,

where
 2kθ/σ2
2he(h+k)(T −t)/2
A(t, T ) =
2h + (h + k)(eh(T −t) − 1)
and
2(eh(T −t) − 1)
B(t, T ) =
2h + (h + k)(eh(T −t) − 1)
with

h= k 2 + 2σ 2 .

Theorem 4.21 (Bond-price dynamics in the CIR model). In the CIR model,
the price of a zero-coupon bond with maturity T satisfies the stochastic differential
equations

dP (t, T ) = r(t)P (t, T )dt − σ r(t)B(t, T )P (t, T )dW (t)

and 
1 (σ 2 B 2 (t, T ) − 1)r(t) σ r(t)B(t, T )
d = dt + dW (t).
P (t, T ) P (t, T ) P (t, T )
4.5. AFFINE TERM-STRUCTURE MODELS 23

Theorem 4.22 (T -forward measure dynamics of the short rate in the CIR
model). Under the T -forward measure QT , the short rate r in the CIR model sat-
isfies


dr(t) = kθ − (k + σ 2 B(t, T ))r(t) dt + σ r(t)dW T (t),

where the QT -Brownian motion W T is defined by



dW T (t) = dW (t) + σB(t, T ) r(t)dt.

Theorem 4.23 (Forward-rate dynamics in the CIR model). In the CIR model,
the instantaneous forward interest rate with maturity T is given by

f (t, T ) = kθB(t, T ) + r(t)BT (t, T )

and satisfies the stochastic differential equation



df (t, T ) = σ r(t)BT (t, T )dW T (t).

Theorem 4.24 (Forward-rate dynamics in the CIR model). Let 0 ≤ t ≤ T ≤ S.


In the CIR model, the forward rate F (t; T, S) satisfies
 
1
dF (t; T, S) = σ F (t; T, S) + ×
τ (T, S)
  
A(t, S)
× (B(t, S) − B(t, T )) ln (τ (T, S)F (t; T, S) + 1) dW S (t).
A(t, T )

4.5. Affine Term-Structure Models

Definition 4.25 (Affine term structure). If bond prices are given by

P (t, T ) = A(t, T )e−r(t)B(t,T ) for all 0 ≤ t ≤ T,

where A and B are deterministic functions, then we say that the model possesses
an affine term structure.

Theorem 4.26 (Zero-coupon price in affine term-structure models). In an affine


term-structure model in which the short rate satisfies the stochastic differential equa-
tion

dr(t) = (α(t) − β(t)r(t))dt + γ(t) + δ(t)r(t)dW (t),

we have that P is given by

P (t, T ) = A(t, T )e−r(t)B(t,T ) ,


24 4. ONE-FACTOR SHORT-RATE MODELS

where A and B are solutions of the system of ordinary differential equations


δ(t) 2
Bt (t, T ) = β(t)B(t, T ) + B (t, T ) − 1, B(T, T ) = 0,
2
 
γ(t)
At (t, T ) = A(t, T )B(t, T ) α(t) − B(t, T ) , A(T, T ) = 1.
2

Remark 4.27 (Zero-coupon price in affine term-structure models). The equa-


tion for B does not involve A and is an ordinary differential equation, more precisely,
a Riccati differential equation, which should be solved first. Then, using this solu-
tion B, the equation for A is another ordinary differential equation, more precisely,
a linear differential equation, which can be solved using the formula
    
T
γ(u)
A(t, T ) = exp − B(u, T ) α(u) − B(u, T ) du .
t 2

Theorem 4.28 (Affine term-structure models). In an affine term-structure


model in which the short rate satisfies the stochastic differential equation

dr(t) = μ(t, r(t))dt + σ(t, r(t))dW (t)

with μ and σ as in Theorem 4.26, we have the following formulas:

dP (t, T ) = r(t)P (t, T )dt − σ(t, r(t))B(t, T )P (t, T )dW (t),


1 (σ 2 (t, r(t))B 2 (t, T ) − r(t) σ(t, r(t))B(t, T )
d = dt + dW (t),
P (t, T ) P (t, T ) P (t, T )
dW T (t) = dW (t) + σ(t, r(t))B(t, T )dt,

dr(t) = μ(t, r(t)) − σ 2 (t, r(t))B(t, T ) dt + σ(t, r(t))dW T (t),


AT (t, T )
f (t, T ) = r(t)BT (t, T ) − ,
A(t, T )
df (t, T ) = σ(t, r(t))BT (t, T )dW T (t),
 
1
dF (t; T, S) = σ(t, r(t)) F (t; T, S) + (B(t, S) − B(t, T ))dW S (t).
τ (T, S)

Anda mungkin juga menyukai