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One-Factor Term Structure without Forward Rates

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  • Victor Goodman
  • Kyounghee Kim

Abstract

We construct a no-arbitrage model of bond prices where the long bond is used as a numeraire. We develop bond prices and their dynamics without developing any model for the spot rate or forward rates. The model is arbitrage free and all nominal interest rates remain positive in the model. We give examples where our model does not have a spot rate; other examples include both spot and forward rates.

Suggested Citation

  • Victor Goodman & Kyounghee Kim, 2006. "One-Factor Term Structure without Forward Rates," Papers math/0612035, arXiv.org, revised Dec 2006.
    • Handle: RePEc:arx:papers:math/0612035
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    References listed on IDEAS

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    1. Dothan, Michael U., 1990. "Prices in Financial Markets," OUP Catalogue, Oxford University Press, number 9780195053128.
    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. Miltersen, Kristian R & Sandmann, Klaus & Sondermann, Dieter, 1997. "Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates," Journal of Finance, American Finance Association, vol. 52(1), pages 409-430, March.
    4. Marek Rutkowski & Marek Musiela, 1997. "Continuous-time term structure models: Forward measure approach (*)," Finance and Stochastics, Springer, vol. 1(4), pages 261-291.
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