
TL;DR
This paper introduces an arbitrage-free dynamic framework for discount models, offering an alternative to existing forward rate models, with a focus on affine term structure models and their consistency conditions.
Contribution
It proposes a new arbitrage-free framework for discount models, deriving general conditions and discussing affine models, expanding the theoretical foundation of interest rate modeling.
Findings
Framework ensures arbitrage-free discount modeling
Derives consistency conditions for factor models
Discusses potential research directions
Abstract
Discount is the difference between the face value of a bond and its present value. I propose an arbitrage-free dynamic framework for discount models, which provides an alternative to the Heath--Jarrow--Morton framework for forward rates. I derive general consistency conditions for factor models, and discuss affine term structure models in particular. There are several open problems, and I outline possible directions for further research.
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Taxonomy
TopicsFinancial Markets and Investment Strategies · Financial Reporting and Valuation Research · Stochastic processes and financial applications
