1.6 Conclusion


1.6 Conclusion

Few of the early studies of asset prices within an equilibrium economy setting were applicable to interest rates, mainly focusing on stock prices. If we accept Vasicek's implicit assumption that the functional form of the short-term interest rate process and market price of risk are in fact consistent with an economic equilibrium, then his work may be seen as a complete characterisation of the interest rate term structure in such an economy. This simple model has been praised for its incorporation of reversion to a long-run mean and the ability to produce an analytic representation of discount bond prices. On the other hand, it has been criticised for allowing interest rates to become negative and not providing a mechanism by which the initial, market- observed term structure may be reproduced.




Interest Rate Modelling
Interest Rate Modelling (Finance and Capital Markets Series)
ISBN: 1403934703
EAN: 2147483647
Year: 2004
Pages: 132

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