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Interest Rate Modelling. Wiley Series in Financial Engineering

  • ID: 2215368
  • Book
  • April 2000
  • 676 Pages
  • John Wiley and Sons Ltd
Back Cover ( this section should include endorsements also)

As interest rate markets continue to innovate and expand it is becoming increasingly important to remain up–to–date with the latest practical and theoretical developments. This book covers the latest developments in full, with descriptions and implementation techniques for all the major classes of interest rate models – both those actively used in practice as well as theoretical models still ′waiting in the wings′.

Interest rate models, implementation methods and estimation issues are discussed at length by the authors as are important new developments such as kernel estimation techniques, economic based models, implied pricing methods and models on manifolds.

Providing balanced coverage of both the practical use of models and the theory that underlies them, Interest Rate Modelling adopts an implementation orientation throughout making it an ideal resource for both practitioners and researchers.

Back Flap

Jessica James

Jessica James is Head of Research for Bank One′s Strategic Risk Management group, based in the UK. Jessica started life as a physicist at Manchester University and completed her D Phil in Theoretical Atomic and Nuclear Physics at Christ Church, Oxford, under Professor Sandars. After a year as a college lecturer at Trinity, Oxford, she began work at the First National Bank of Chicago, now Bank One, where she still works. She is well known as a speaker on the conference circuit, lecturing on a variety of topics such as VaR, capital allocation, credit derivatives and interest rate modelling, and has published articles on various aspects of financial modelling.

Nick Webber

Nick Webber is a lecturer in Finance at Warwick Business School. Prior

to his academic career, Nick had extensive experience in the industrial

and commercial world in operational research and computing. After

obtaining a PhD in Theoretical Physics from Imperial College he began

research into financial options. His main area of research centres on

interest rate modelling and computational finance. He has taught

practitioner and academic courses for many years, chiefly on options and

interest rates.

Front Flap

Interest Rate Modelling provides a comprehensive resource on all the main aspects of valuing and hedging interest rate products.

A series of introductory chapters reviews the theoretical background, pointing out the problems in using naïve valuation and implementation techniques. There follows a full analysis of interest rate models including major categories, such as Affine, HJM and Market models, and in addition, lesser well known types that include Consol, Random field and Jump–augmented Models. Implementation methods are discussed in depth including the latest developments in the use of finite difference, Lattice and Monte Carlo methods and their particular application to the valuation of interest rate derivatives.

Containing previously unpublished material, Interest Rate Modelling is a key reference work both for practitioners developing and implementing models for real and for academics teaching and researching in the field.
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Part I: Introduction to interest rate modelling

1. Introduction to interest rates

Interest rate behaviour;

Basic concepts;

Interest rate markets;

Historical and current data;

Uses of interest rate models;


2. Interest rates in history

Interest rates in monetary history;

Characteristics of interest rate behaviour

3. Introduction to interest rate modelling

Yield curve basics;

Describing interest rate processes;

Introducton to interest rate models;

Categories of interest rate model;

The role of the short rate

4. Interest rate models: theory

Summary of valuation

A theoretical market framework;

Fundamentals of pricing; valuing by change of numeraire;

Derivatives in the extended Vasicek model

5. Basic modelling tools

Introduction to valuation;

Introduction to estimation;

Statistical tests;

Yield curve stripping;

The convexity adjustment

6. Densities and distributions

The density function;

Kernel methods;

Boundary behaviour;

Interest rate models at extreme values of interest rates;

Tail distributions

Part II Interest rate models

7. Affine models

Affine term structure models;

Interpreting the state variables;

Types of affine model;

Examples of one–factor affine models;

Examples of n–factor affine models;

A general framework for affine models

8. Market models and the Heath, Jarrow and Morton framework

Introduction to the Heath, Jarrow and Morton model;

Volatility functions in HJM;

Market models;

General market models

9. Other interest rate models

Consol models;

Price kernet models;

Positive interest rate models;

Non–linear models

10. General formulations of interest rate models

Jump processes;

Random field models;

A general model;

Jump models

11. Economic models

Economics and interest rates

An economically motivated financial model of interest rates;

An IS–LM based model;

IS–LM, hyperinflation and extended Vasicek;

The general equilibrium framework;

Interpreting the price kernel

Part III Valuation methods

12. Finite difference methods

The Feynman–Kac Equation;

Discretising the PDE;

Simplifying the PDE;

Explicit methods;

Implicit methods;

The Crank–Nicolson method;

Comparison of methods;

Implicit boundary conditions;

Fitting to an initial term structure;

Finite difference methods in N dimensions;

Operator splitting;

A two–dimensional PDE;

Solving a PDDE

13. Valuation: the Monte Carlo method

The basic Monte Carlo method;

Speed–up methods;

Sampling issues;

Simulation methods for HJM models

14. Lattice methods

Introduction to lattice methods;

Issues in constructing a lattice;

Examples of lattice methods;

Calibration to market prices;

The explicit finite difference method;

Lattices and the Monte Carlo method;

Non–recombining lattices;


Part IV Calibration and estimation

15. Modelling the yield curve

Stripping the yield curve;

Fitting using parameterised curves;

Fitting the yield curve using splines;

Nelson and Siegel curves;

Comparison of families of curves;

Kernel methods of yield curve estimations;

LP and regression methods

16. Principal components analysis

Volatility structures;

Identifying empirical volatility factors;

Calibrating whole yield curve methods;

Processes on manifolds;

Analysis of dynamical systems;


17. Estimation methods: GMM and ML

GMM estimation;

Implementation issues;

The efficient method of moments (EMM);

Maximum likelihood methods;

Hierarchy of procedures

18. Further estimation methods


Filtering approaches to estimation;

The extended Kalman Filter;

GARCH models;

Extensions of GARCH;

Interest rate models and GARCH;

Artificial neural nets (ANNs)

19. Interest rates and implied pricing

Problems with interest rate models;

Key relationships;

The interest rate case;

The implied pricing method;

Regularisation functions;

Patching tails onto pricing densities



Glossary of mathematical, market and model terms


Author Index

Subject Index
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Jessica James
Nick Webber
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