engleski

Diffusion processes in modelling the term structure of interest rates

Some of the main contributions to the so-called new term structure theory are presented, showing how stochastic processes, specially diffusion processes, and stochastic differential equations are used in the single-factor models for interest rates, based on the no-arbitrage principle. The main result in the paper is the partial differential equation which can be used to price any interest rate sensitive (IRS) asset.

term structure of interest rates; single-factor diffusion models; spot interest rate; Ito stochastic differential equation; Ito's lemma; valuation of IRS securities

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