FIN-02-055 |
NYU Stern School of Business |
Fixed Income Pricing
July 2002
Qiang Dai and Kenneth Singleton
ABSTRACT
TThis chapter surveys the literature on fixed-income pricing models, includ-
ing dynamic term structure models (DTSMs) and interest rate sensitive,
derivative pricing models. This literature is vast with both the academic
and practitioner communities having proposed a wide variety of models and
model-selection criteria. Central to all pricing models, implicitly or explic-
itly, are: (i) the identity of the state vector: whether it is latent or observable
and, in the latter case, which observable series; (ii) the law of motion (con-
ditional distribution) of the state vector under the pricing measure; and (iii)
the functional dependence of the short-term interest rate on this state vector.
A primary objective, then, of research on fixed-income pricing has been the
selection of these ingredients to capture relevant features of history, given the
objectives of the modeler, while maintaining tractability, given available data
and computational algorithms. Accordingly, we overview alternative concep-
tual approaches to fixed-income pricing, highlighting some of the tradeoffs
that have emerged in the literature between the complexity of the proba-
bility model for the state, data availability, the pricing objective, and the
tractability of the resulting model.
Qiang Dai
Institution: Stern School of Business, New York University, 44th West 4th Street, NY 10012
Telephone: (212) 998-0358
Fax: (212) 995-4233
Email: qdai@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~qdai
Kenneth Singleton
Institution: Graduate School of Business, Stanford University, Stan-
ford, CA 94305
Email:ken@future.stanford.edu
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