The efficient rate of return of a zero-coupon bond with maturity t is determined by our expectations about the mean (+), variance (-) and skewness (+) of the growth of aggregate consumption between 0 and t. The shape of the yield curve is thus determined by how these moments vary with t. We first examine growth processes in which a higher past economic growth yields a first-degree dominant shif...

The problem of robust estimation and multivariate outlier detection of the term structure of default intensity is considered. Both themultivariate Vasicek andCIRmodels, embedding the Kalman filter algorithm in a forward search context, are used to estimate default intensity. The focus is not on the estimation of credit models including jumps, but on the automatic detection ofmaskedmultiple outl...

In this paper, we show how to calculate the price of zerocoupon bonds for many Gaussian and Lévy one-factor and multi-factor models of r(t) using change of time method. These models include, in particular, Ornshtein-Uhlenbeck (1930), Vasicek (1977), Cox-Ingersoll-Ross (1985), continuous-time GARCH, Ho-Lee (1986), Hull-White (1990) and HeathJarrrow-Morton (1992) models and their various combinat...

Guaranteed Annuity Options (GAOs) are options available to holders of certain pension policies. Under these contracts, policyholders contribute premiums into a fund managed by the insurer. At retirement, the policyholders buy life annuities at a guaranteed rate provided by the original insurer, or annuitize with another insurer. If the guaranteed annuity rates are better than the prevailing rat...

This paper provides explicit analytical characterizations for first hitting time densities for Cox–Ingersoll–Ross (CIR) and Ornstein–Uhlenbeck (OU) diffusions in terms of relevant Sturm–Liouville eigenfunction expansions. Starting with Vasicek (1977) and Cox, Ingersoll and Ross (1985), the Gaussian Ornstein– Uhlenbeck and Feller’s (1951) square-root diffusions are among the most commonly used s...

This paper develops a continuous time modeling approach for making optimal asset allocation decisions. Macroeconomic and "nancial factors are explicitly modeled as Gaussian stochastic processes which directly a!ect the mean returns of the assets. We employ methods of risk sensitive control theory, thereby using an in"nite horizon objective that is natural and features the long run expected grow...