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Fixed-Income Pricing in a Non-Linear Interest-Rate Model

Author

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  • J-P. Renne

Abstract

This paper introduces a novel kind of interest-rate model offering simple analytical pricing formulas for swaps, futures, swaptions, caps and floors. The model is based on an original use of regime-switching features that makes it consistent with the non-linear behavior of interest rates. In particular, it accommodates the fact that short-term rate fluctuations are mainly driven by discrete changes in the central-bank policy rates. An application on euro-area data shows how the model can be exploited to infer risk-neutral probabilities of central-bank rate decisions.

Suggested Citation

  • J-P. Renne, 2014. "Fixed-Income Pricing in a Non-Linear Interest-Rate Model," Working papers 517, Banque de France.
    • Handle: RePEc:bfr:banfra:517
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    File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_517_2014.pdf
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    Cited by:

    1. J-P. Renne, 2014. "Options Embedded in ECB Targeted Refinancing Operations," Working papers 518, Banque de France.

    More about this item

    Keywords

    yield curve; option pricing; regime switching; market expectations.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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