Short Rates Models
[Introduction]
General Idea
Advantages
Drawback
The main drawbacks of short rate models:
- From an economic point of view it seems unreasonable to assume that the entire money market is governed by only one explanatory variable.
- It is hard to obtain a realistic volatility structure for the forward rates without introducing a very complicated short rate model.
- As the short rate model becomes more realistic, the inversion of the yield curve described above becomes increasingly more difficult.
[Vasicek]
[CIR]
[Hull and White]
[CIR++]
Forward Curve Models
[Heath–Jarrow–Morton Framework]
Forward Rates Models
[Bachelier Model]
[Black Model]
[Libor Market Model or Brace–Gatarek–Musiela Model]
[Local Volatility or Dupire]
Resources
See: