Lie-Algebraic Approach for Pricing Zero-Coupon Bonds in Single-Factor Interest Rate Models

Journal of Applied Mathematics, Volume 2013, Article ID 276238

9 Pages Posted: 22 Apr 2011 Last revised: 14 May 2013

See all articles by Chi-Fai Lo

Chi-Fai Lo

The Chinese University of Hong Kong

Date Written: May 10, 2013

Abstract

The Lie-algebraic approach has been applied to solve the bond pricing problem in single-factor interest rate models. Four of the popular single-factor models, namely the Vasicek model, Cox-Ingersoll-Ross model, double square-root model, and Ahn-Gao model, are investigated. By exploiting the dynamical symmetry of their bond pricing equations, analytical closed-form pricing formulae can be derived in a straightfoward manner. Time-varying model parameters could also be incorporated into the derivation of the bond price formulae, and this has the added advantage of allowing yield curves to be fitted. Furthermore, the Lie-algebraic approach can be easily extended to formulate new analytically tractable single-factor interest rate models.

Keywords: Bond pricing equation, Zero-coupon bond, Interest rate model, Lie algebra

Suggested Citation

Lo, Chi-Fai, Lie-Algebraic Approach for Pricing Zero-Coupon Bonds in Single-Factor Interest Rate Models (May 10, 2013). Journal of Applied Mathematics, Volume 2013, Article ID 276238, Available at SSRN: https://ssrn.com/abstract=1813669 or http://dx.doi.org/10.2139/ssrn.1813669

Chi-Fai Lo (Contact Author)

The Chinese University of Hong Kong ( email )

Department of Physics
Shatin, N.T., Hong Kong
China

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