Equilibrium short-rate models vs no-arbitrage models: Literature review and computational examples

Josheski, Dushko and Apostolov, Mico (2021) Equilibrium short-rate models vs no-arbitrage models: Literature review and computational examples. Econometrics. Ekonometria. Advances in Applied Data Analysis, 25 (3). 42 -71. ISSN 2449-9994

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Abstract

In this paper equilibrium short-rate models are compared against no-arbitrage short-rate models. This article is composed of the introduction to this literature and a review, followed by numerical examples of one-factor short-rate models; the Cox-Ingersoll-Ross (CIR) model and the Vasicek model. No-arbitrage models were presented through the Hull-White (HW) model, the Binomial lattice model for bond pricing and interest rate modelling, the Black-Karasinski (BK) model, and the Heath-Jarrow-Morton (HJM) model. The results prove that no single interest rate model exists that can be used for all purposes. These models were compared in terms of volatility, mean reversion process and convergence. The end results confirm the dependence of volatility on the level rate as a determinant of the predictive success of these models.

Item Type:	Article
Subjects:	Social Sciences > Economics and business
Divisions:	Faculty of Tourism and Business Logistics
Depositing User:	Dusko Josevski
Date Deposited:	14 Oct 2021 07:55
Last Modified:	14 Oct 2021 07:55
URI:	https://eprints.ugd.edu.mk/id/eprint/28572

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