THE CLASSIFICATION OF TERM STRUCTURE SHAPES IN THE TWO-FACTOR VASICEK MODEL - A TOTAL POSITIVITY APPROACH
Research output: Contribution to journal › Research article › Contributed › peer-review
Abstract
We provide a full classification of all attainable term structure shapes in the two-factor Vasicek model of interest rates. In particular, we show that the shapes normal, inverse, humped, dipped and hump-dip are always attainable. In certain parameter regimes, up to four additional shapes can be produced. Our results apply to both forward and yield curves and show that the correlation and the difference in mean-reversion speeds of the two factor processes play a key role in determining the scope of attainable shapes. The key mathematical tool is the theory of total positivity, pioneered by Samuel Karlin and others in the 1950s.
Details
Original language | English |
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Article number | 2150027 |
Number of pages | 27 |
Journal | International journal of theoretical and applied finance |
Volume | 24 |
Issue number | 5 |
Publication status | Published - Aug 2021 |
Peer-reviewed | Yes |
External IDs
Scopus | 85113341438 |
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ORCID | /0000-0003-0913-3363/work/166762735 |
Keywords
DFG Classification of Subject Areas according to Review Boards
ASJC Scopus subject areas
Keywords
- yield curve, forward curve, term structure, Vasicek model, interest rates, total positivity, Descartes system, Term structure, Yield curve, Forward curve, Total positivity, Interest rates