Questions about Implementing Short Rate Models

[Murat]

Dear All,

I am trying to write a paper about the short rate models and I would like to use Vasicek and CIR model and to do their comparison. I am writing from Turkey and I would like to implement these models to government eurobonds. I am reading the literature about short rate models but I wonder that is it possible to use Vasicek or CIR for modelling the eurobonds? They all have coupons and not in domestic currency. They are either denominated in dollars or euros. I don't know what do I need to do? Could you pls show me the way and give me some clues? Or Am I on the wrong way? Which model fits eurobonds (with coupons and foreign currency)?

 

[rloz]

Hi,

One good source is the book "Implementing Derivative Security Models" by Clewlow and Strickland. Has pseudocode for implementing binomial/tri-nomial lattices for most popular short rate models such as BDT, Hull-White, Black Karasinski calibrated to yield curve or yield-curve/ vol term structure.

 

[vickieschmidt]

Hi,

I do agree with the one who said "Clewlow and Strickland", besides if you want to work with closed formulae i can pass you the ones for CIR'85 and Vasicek to price bonds (in Brigo-Mercurio (interest rate models theory and practice) you can find its expressions for conditional expectations and conditional variance) in order to price bonds with A(tau) and B(tau).

I hope it can help.

VS