Term Structure - Single Factor Models
Overview
Short rate models are models of the short rate (usually the shortest available rate, such as the overnight, but at times as long as 3 months).
The model describes the dynamics of the short rate (the statistical evolution of the rate) The value of longer rates on the curve
can be derived from the statistics of the short rate using risk neutral arguments. Therefore, short rate models are simple models
that provide a description of the entire term structure. These models are useful because of their simplicity, but at the same
time arent able to fully capture the term structure dynamics, so they represent something of an idealization.
Generic Model
The generic model is a generic functional form of various short rate models listed below.
{% dr = u(r, t) dt + v(r, t) dW %}
(
wilmott sect. 16.2)
Mathematical Tools
Named Models
