Discrete Time Models of Bond Pricing
journal contributionposted on 01.12.2001, 00:00 by David Backus, Silvio Foresi, Chris I Telmer
We explore a variety of models and approaches to bond pricing, including those associated with Vasicek, Cox-Ingersoll-Ross, Ho and Lee,and Heath-Jarrow-Morton, as well as models with jumps, multiple factors, and stochastic volatility. We describe each model in a common theoretical framework and explain the reasoning underlying the choice of parameter values. Our framework has continuous state variables but discrete time, which we regard as a convenient middle ground between the stochastic calculus of high theory and the binomial models of classroom fame. In this setting, most of the models we examine are easily implemented on a spreadsheet.