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Discount Models

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  • Damir Filipovic

Abstract

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

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  • Damir Filipovic, 2023. "Discount Models," Papers 2306.16871, arXiv.org, revised Jul 2023.
    • Handle: RePEc:arx:papers:2306.16871
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    References listed on IDEAS

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    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, 2016. "Polynomial diffusions and applications in finance," Finance and Stochastics, Springer, vol. 20(4), pages 931-972, October.
    4. 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.
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