Article ID: | iaor20073322 |
Country: | Netherlands |
Volume: | 151 |
Issue: | 1 |
Start Page Number: | 99 |
End Page Number: | 117 |
Publication Date: | Apr 2007 |
Journal: | Annals of Operations Research |
Authors: | Mellios Constantin |
Keywords: | financial, investment |
This paper aims at examining the term structure of interest rates and European-type interest rate option prices in a partially observable economy. It extends the existing literature on incomplete information by developing a one-factor model which is consistent with the initial yield curve and by providing closed-form solutions for discount bonds and different kinds of options. The model of this paper encompasses Hull and White's model. Moreover, through a numerical example, these two models are compared and the impact of incomplete information on option prices is analysed.