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Abstract: An Equilibrium Characterization of the Term Structure

Published online by Cambridge University Press:  19 October 2009

Oldrich Alfonso Vasicek
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Extract

The paper derives a general form of the term structure of interest rates. The following assumptions are made: (A1) The instantaneous (spot) interest rate follows a diffusion process; (A2) the price of a discount bond depends only on the spot rate over its term; and (A3) the market is efficient. Under these assumptions, it is shown by means of an arbitrage argument that the expected rate of return on any bond in excess of the spot rate is proportional to its standard deviation.

Type
Abstracts of Conference Papers: Capital Market Theory
Information
Journal of Financial and Quantitative Analysis , Volume 12 , Issue 4 , November 1977 , pp. 627
Copyright
Copyright © School of Business Administration, University of Washington 1977

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