Short-rate models underlie the first steps of quantitative finance development. The main feature of such models consists of postulating the short-rate process. Vasicek (1977) and Hull & White (1990) pioneered a Gaussian short-rate model still popular among practitioners due to its analytical tractability and transparency. Black & Karasinski (1991) have proposed a lognormal short-rate model. Both models share the same Gaussian mean-reverting process but with different interpretations in terms of the short rate. Later, there appeared multi-factor generalisations (see, for example, Hull & White, 1994) as well as functional generalisations (for example, the generalised Black-Karasinski (BK) (Tourrucôo, Hagan & Schleiniger, 2007) and quadratic short-rate models (Piterbarg, 2009)). One can also mention the exactly solvable Cox-Ingersoll-Ross (CIR) short-rate model (1985).
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The week in Risk.net, February 10-16 2017Receive this by email