3.3 Conclusion


3.3 Conclusion

The specific model formulations and empirical investigations undertaken by BS admit criticism due to their lack of stability and inconclusiveness of results. This should, however, not influence the significance of their general model formulation, which is mathematically and economically sound. The general model is an equilibrium model; hence the drifts are real world drifts and internal consistency requirements needed to eliminate one of the market prices of risk are encapsulated in the choice of state variables . BS provide a methodology which is successful in reducing the complexity of modelling the term structure. An alternative choice for the specific functional form of each stochastic process can produce reasonable descriptions of the evolution of the term structure.




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