6.4 Conclusion


6.4 Conclusion

In this model, BT assume that default-free discount bond prices follow a nonstandardised Brownian Bridge process. This assumption satisfies the pull-to-par characteristic of bond prices, but ignores the dependence of bond prices on the underlying interest rate term structure. No restrictions are placed on the dynamics of the bond price to ensure a model that precludes profitable arbitrage. This essential factor limits the usefulness and applicability of this model.




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

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