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Discount models

Author

Listed:
  • Damir Filipović

    (EPFL and Swiss Finance Institute)

Abstract

Discount is the difference between the face value of a bond and its present value. We propose an arbitrage-free dynamic framework for discount models, which provides an alternative to the Heath–Jarrow–Morton framework for forward rates. We derive general consistency conditions for factor models, and discuss affine term structure models in particular. There are several open problems, and we outline possible directions for further research.

Suggested Citation

  • Damir Filipović, 2023. "Discount models," Finance and Stochastics, Springer, vol. 27(4), pages 933-946, October.
    • Handle: RePEc:spr:finsto:v:27:y:2023:i:4:d:10.1007_s00780-023-00514-0
    DOI: 10.1007/s00780-023-00514-0
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    References listed on IDEAS

    as
    1. Damir Filipović & Martin Larsson & Francesco Statti, 2019. "Unspanned stochastic volatility in the multifactor CIR model," Mathematical Finance, Wiley Blackwell, vol. 29(3), pages 827-836, July.
    2. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    3. Damir Filipović & Martin Larsson & Anders B. Trolle, 2017. "Linear-Rational Term Structure Models," Journal of Finance, American Finance Association, vol. 72(2), pages 655-704, April.
    4. Damir Filipović & Martin Larsson, 2016. "Polynomial diffusions and applications in finance," Finance and Stochastics, Springer, vol. 20(4), pages 931-972, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Discount; Factor models; Stochastic partial differential equation; Term structure models; Zero-coupon bonds;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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