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New Approximations to Bond Prices in the Cox–Ingersoll–Ross Convergence Model with Dynamic Correlation

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  • Beáta Stehlíková

    (Faculty of Mathematics, Physics and Informatics, Comenius University, Mlynská Dolina, 842 48 Bratislava, Slovakia)

Abstract

We study a particular case of a convergence model of interest rates. The bond prices are given as solutions of a parabolic partial differential equation and we consider different possibilities of approximating them, using approximate analytical solutions. We consider an approximation already suggested in the literature and compare it with a newly suggested one for which we derive the order of accuracy. Since the two formulae use different approaches and the resulting leading terms of the error depend on different parameter sets of the model, we propose their combination, which has a higher order of accuracy. Finally, we propose one more approach, which leads to higher accuracy of the resulting approximation formula.

Suggested Citation

  • Beáta Stehlíková, 2021. "New Approximations to Bond Prices in the Cox–Ingersoll–Ross Convergence Model with Dynamic Correlation," Mathematics, MDPI, vol. 9(13), pages 1-10, June.
    • Handle: RePEc:gam:jmathe:v:9:y:2021:i:13:p:1469-:d:580240
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    2. Moreno, Manuel & Platania, Federico, 2015. "A cyclical square-root model for the term structure of interest rates," European Journal of Operational Research, Elsevier, vol. 241(1), pages 109-121.
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    4. Chan, K C, et al, 1992. "An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-1227, July.
    5. Teresa Corzo Santamaria & E. S. Schwartz, 2000. "Convergence within the EU: Evidence from Interest Rates," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 29(2), pages 243-266, July.
    6. Fabricio Tourrucoo & Patrick S. Hagan & Gilberto F. Schleiniger, 2007. "Approximate Formulas for Zero-coupon Bonds," Applied Mathematical Finance, Taylor & Francis Journals, vol. 14(3), pages 207-226.
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