20-Term Structure Page 647 Wednesday, February 4, 2004 1:33 PM
Term Structure Modeling and Valuation of Bonds and Bond Options 647■ A number of classical economic theories explain the shape of the term
structure.
■ Mathematically, the term structure can be derived by a model of short-
term interest rates.
■ Multifactor models of the term structure are based on multifactor mod-
els of the short-term interest rates.
■ A number of models for the short term rate as (multivariate) Itô pro-
cesses have been proposed.
■ The term structure of the interest rates can also be modelled starting
from a model of the forward rates.
■ Features of term structure models include absence of arbitrage, mean
reversion, ability to fit empirical term structure.