Stylized Properties of the Interest Rate Term Structure under the Benchmark Approach
Abstract
Market models which reflect stylized properties of the interest rate term structure are widely used for modelling and pricing interest rate derivatives. We consider a market model involving the short rate and a diversified global stock index. We illustrate the stylized properties of the interest rate term structure implied by a system of stochastic differential equations specifying the short rate and the discounted stock index under the benchmark approach. Comparison with empirical evidence, particularly ten and thirty-year treasury bond yields, demonstrates the explanatory power of a discounted stock index modelled by a squared Bessel process.
Fields of Study & Subjects
Stochastic processes and financial applications
Publication details
- Journal / source
- Annals of Financial Economics
- Publisher
- World Scientific Pub Co Pte Ltd
- Volume
- 21
- Issue
- 03
- Publication date
- 16 June 2026
- Language
- EN