Visit Link

Description:
by Angelos Dassios and Jayalaxshmi Nagaradjasarma

In this paper, we study the integral over time of the instantaneous rate, i.e the interest rate accrual, in the Cox Ingersoll Ross model. We derive distributional results for this process, including series representations for the density
and probability distribution function. Applications to the valuation of derivatives, including Asian options prices in closed form, are presented here. Numerical examples are included to demonstrate the speed of convergence of the series. We also find that the series provide a more robust tool than numerical Laplace transform inversion for regions of high maturity and volatility. Given the versatility of the square-root process, the results derived in this
paper are also of value for various others areas of finance, among which stochastic volatility and credit derivatives

KEY WORDS
Derivatives, valuation, Square-root process, average-rate claims