Asymptotic behavior of bond yields and volatilities for the extended 3/2 model under the real-world measure

Kevin Fergusson*

*Corresponding author for this work

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Abstract

The extended 3/2 short rate model is a mean reverting model of the short rate which, for suitably chosen parameters, permits a sensible term structure of bond yields and closed-form valuation formulae of zero-coupon bonds and options. This article supplies proofs of the formulae for the expected present values of future cash flows under the real-world probability measure, known as actuarial valuation. Finally, we give formulae for asymptotic levels of bond yields and formulae for bond option prices for the extended 3/2 model, under particular conditions on its parameters.

Original languageEnglish
Pages (from-to)1-30
JournalAnnals of Actuarial Science
DOIs
Publication statusAccepted/In press - 18 Nov 2024

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