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The Continuous-Time Ehrenfest Process in Term Structure Modelling

Published online by Cambridge University Press:  14 July 2016

A. Kaplun*
Affiliation:
TU Dortmund University
*
Postal address: Department of Mathematics, TU Dortmund University, Vogelpothsweg 87, D-44221 Dortmund, Germany. Email address: alexander.kaplun@math.uni-dortmund.de
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Abstract

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In this paper, a finite-state mean-reverting model for the short rate, based on the continuous-time Ehrenfest process, will be examined. Two explicit pricing formulae for zero-coupon bonds will be derived in the general and special symmetric cases. Its limiting relationship to the Vasicek model will be examined with some numerical results.

Type
Research Article
Copyright
Copyright © Applied Probability Trust 2010 

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