Modeling the term structure of interest rates with general short-rate models

摘要

We propose a model of the term structure of interest rates with generally specified processes of the short-rate. As documented by many studies, it is important to model the short-rate generally to capture its observed behavior. This adequate specification is essential for term structure models to explain yields accurately. With such general conditions, however, term structure models cannot be obtained explicitly. In this paper we derive an analytical model of the term structure by locally approximating a short-rate process with nonlinear drift and diffusion terms. The empirical analysis confirms that the proposed model outperforms the existing affine term structure model.