A Unified Approximation Formula for Zero-Coupon Bond Prices

11 Pages Posted: 3 Aug 2014

See all articles by Hideharu Funahashi

Hideharu Funahashi

Kanagawa University; Kanagawa University

Takaya Fukui

Mizuho Securities Co. Ltd; University of Tokyo - Graduate School of Economics

Date Written: July 27, 2014

Abstract

This paper provides an analytical approximation for zero-coupon bond prices when the short rate follows a diffusion process. Unlike previous methods, our method, based on successive substitution proposed by Funahashi and Kijima (2015), is applicable for general short rate models. Through ample numerical examples, we show that the accuracy of our approximation is quite high even in the case of high volatilities and/or long maturities. Comparisons are made with the existing methods in the literature.

Keywords: Short rate model, Successive substitution, Wiener-Ito chaos expansion, Zero-Coupon

JEL Classification: G12, G13

Suggested Citation

Funahashi, Hideharu and Fukui, Takaya and Fukui, Takaya, A Unified Approximation Formula for Zero-Coupon Bond Prices (July 27, 2014). Available at SSRN: https://ssrn.com/abstract=2472503 or http://dx.doi.org/10.2139/ssrn.2472503

Hideharu Funahashi (Contact Author)

Kanagawa University ( email )

Japan

Kanagawa University ( email )

Kanagawa-ku, Yokohama City 221-8686
JAPAN

Takaya Fukui

Mizuho Securities Co. Ltd ( email )

Tokyo
100-0004
Japan

University of Tokyo - Graduate School of Economics ( email )

7-3-1 Hongo
Bunkyo-ku
Tokyo, 113-0033
Japan

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
80
Abstract Views
584
Rank
261,207
PlumX Metrics