The curious case of backward short rates

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Andrei Lyashenko and Yutian Nie discuss how to discretise continuous-time short-rate models in order to properly handle backward-looking interest rate derivatives. They show that the popular discretisation approaches are based on forward-looking one-period rates, making them intrinsically ill-suited to deal with backward-looking rates. They propose a simple backward discretisation approach that is beneficial when dealing with both backward-looking and forward

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