Main category
Economics (General Management)
Abstract
The Monte Carlo Multi-factor Short Rate Mode has been used extensively in pricing a variety of interest rate derivative securities. The model assumes that short rates at reset dates are lognormally distributed; the short rate at a reset time arises as the limiting spot value from a corresponding forward rate process, which is a geometric Brownian motion with drift. The short rate model is, by construction, arbitrage free, and numerical test results bear this out.
Further reading
https://ia904708.us.archive.org/12/items/monte-carlo-short-rate/MonteCarloShortRate.pdf
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