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Bilinear Term Structure Model

Monfort, Alain; Gouriéroux, Christian (2011), Bilinear Term Structure Model, Mathematical Finance, 21, 1, p. 1-19. http://dx.doi.org/10.1111/j.1467-9965.2010.00424.x

Type
Article accepté pour publication ou publié
Date
2011
Journal name
Mathematical Finance
Volume
21
Number
1
Publisher
Wiley
Pages
1-19
Publication identifier
http://dx.doi.org/10.1111/j.1467-9965.2010.00424.x
Metadata
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Author(s)
Monfort, Alain
Gouriéroux, Christian
Abstract (EN)
The Gaussian Affine Term Structure Model (ATSM) introduced by Duffie and Kan is often used in finance to price derivatives written on interest rates or to compute the reserve to hedge a portfolio of credits (CreditVaR), and in macroeconomic applications to study the links between real activity and financial variables. However, a standard three-factor ATSM, for instance, implies a deterministic affine relationship between any set of four rates, with different times-to-maturity, and these relationships are not observed in practice. In this paper, we introduce a new class of affine term structure models, called Bilinear Term Structure Model (BTSM). This extension breaks down the deterministic relationships between rates in structural factor models by introducing lagged factor values, and the linear dependence by considering quadratic effects of the factors.
Subjects / Keywords
bilinear process; Wishart process; credit risk; monetary policy; quadratic term structure; affine term structure
JEL
G1 - General Financial Markets

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