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Interest-Rate Modeling Conundrums

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DOI: 10.4236/jmf.2014.45030    3,555 Downloads   4,127 Views  
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ABSTRACT

The mainstream research in interest-rate modeling has been focusing on a collection of risk tools and pricing formulas which are developed based on the simplified market assumptions and hypotheses. Despite the elegance of the structure, it is noticed that a crucial yet natural factor is missing: the relationship between curve-fitting algorithms and no-arbitrage restrictions on a bond portfolio. Also, the discrepancy between risk-free and default-free bonds is often ignored. This study discusses the modeling conundrums and proposes a framework based on the preferred-habitat hypothesis for advanced term-structure construction that overcomes these limitations in current models. This article serves as an introduction for future work.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

Lin, P. (2014) Interest-Rate Modeling Conundrums. Journal of Mathematical Finance, 4, 328-332. doi: 10.4236/jmf.2014.45030.

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