An empirical comparison of continuous time models of the short term interest rate

Article Abstract:

The performance of various continuous time models were compared to capture the stochastic behavior of short-term interest rate volatility. The study, which used the United States Treasury bill one-month yield data, particularly emphasized the Black, Derman, and Toy model, which assumes that changes in short-term interest rates follow a lognormal probability distribution. Results show that models that define the conditional volatility as a function and introduce time-dependent parameters to the short rate process are the most effective models.

Interest rates

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The compatibility of one-factor market models in caps and swaptions markets: evidence from their dynamic hedging performance

Article Abstract:

The dynamic hedging performances of the one-factor LIBOR and swap market models in caps and swaptions markets are studied. LIBOR market models outperform the swap market models in hedging floors and have comparable performance in hedging swaptions.

Canada, Hedging (Finance), Interest rate swaps, Report

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