Interest Rate Modelling

Back Cover ( this section should include endorsements also)
As interest rate markets continue to innovate and expand it is becoming increasingly important to remain up–to–date with the latest practical and theoretical developments. This book covers the latest developments in full, with descriptions and implementation techniques for all the major classes of interest rate models – both those actively used in practice as well as theoretical models still ′waiting in the wings′.
Interest rate models, implementation methods and estimation issues are discussed at length by the authors as are important new developments such as kernel estimation techniques, economic based models, implied pricing methods and models on manifolds.
Providing balanced coverage of both the practical use of models and the theory that underlies them, Interest Rate Modelling adopts an implementation orientation throughout making it an ideal resource for both practitioners and researchers.
Back Flap
Jessica James
Jessica James is Head of Research for Bank One′s Strategic Risk Management group, based in the UK. Jessica started life as a physicist at Manchester University and completed her D Phil in Theoretical Atomic and Nuclear Physics at Christ Church, Oxford, under Professor Sandars. After a year as a college lecturer at Trinity, Oxford, she began work at the First National Bank of Chicago, now Bank One, where she still works. She is well known as a speaker on the conference circuit, lecturing on a variety of topics such as VaR, capital allocation, credit derivatives and interest rate modelling, and has published articles on various aspects of financial modelling.
Nick Webber
Nick Webber is a lecturer in Finance at Warwick Business School. Prior
to his academic career, Nick had extensive experience in the industrial
and commercial world in operational research and computing. After
obtaining a PhD in Theoretical Physics from Imperi al College he began
research into financial options. His main area of research centres on
interest rate modelling and computational finance. He has taught
practitioner and academic courses for many years, chiefly on options and
interest rates.
Front Flap
Interest Rate Modelling provides a comprehensive resource on all the main aspects of valuing and hedging interest rate products.
A series of introductory chapters reviews the theoretical background, pointing out the problems in using naïve valuation and implementation techniques. There follows a full analysis of interest rate models including major categories, such as Affine, HJM and Market models, and in addition, lesser well known types that include Consol, Random field and Jump–augmented Models. Implementation methods are discussed in depth including the latest developments in the use of finite difference, Lattice and Monte Carlo methods and their particular application to the valuation of interest rate derivatives.
Containing previously unpublished material, Interest Rate Modelling is a key reference work both for practitioners developing and implementing models for real and for academics teaching and researching in the field.

Spis treści:
Part I: Introduction to interest rate modelling
1. Introduction to interest rates
Interest rate behaviour;
Basic concepts;
Interest rate markets;
Historical and current data;
Uses of interest rate models;
Conclusion
2. Interest rates in history
Interest rates in monetary history;
Characteristics of interest rate behaviour
3. Introduction to interest rate modelling
Yield curve basics;
Describing interest rate processes;
Introducton to interest rate models;
Categories of interest rate model;
The role of the short rate
4. Interest rate models: theory
Summary of valuation
A theoretical market framework;
Fundamentals of pricing; valuing by change of numeraire;
De rivatives in the extended Vasicek model
5. Basic modelling tools
Introduction to valuation;
Introduction to estimation;
Statistical tests;
Yield curve stripping;
The convexity adjustment
6. Densities and distributions
The density function;
Kernel methods;
Boundary behaviour;
Interest rate models at extreme values of interest rates;
Tail distributions
Part II Interest rate models
7. Affine models
Affine term structure models;
Interpreting the state variables;
Types of affine model;
Examples of one–factor affine models;
Examples of n–factor affine models;
A general framework for affine models
8. Market models and the Heath, Jarrow and Morton framework
Introduction to the Heath, Jarrow and Morton model;
Volatility functions in HJM;
Market models;
General market models
9. Other interest rate models
Consol models;
Price kernet models;
Positive interest rate models;
Non–linear models
10. General formulations of interest rate models
Jump processes;
Random field models;
A general model;
Jump models
11. Economic models
Economics and interest rates
An economically motivated financial model of interest rates;
An IS–LM based model;
IS–LM, hyperinflation and extended Vasicek;
The general equilibrium framework;
Interpreting the price kernel
Part III Valuation methods
12. Finite difference methods
The Feynman–Kac Equation;
Discretising the PDE;
Simplifying the PDE;
Explicit methods;
Implicit methods;
The Crank–Nicolson method;
Comparison of methods;
Implicit boundary conditions;
Fitting to an initial term structure;
Finite difference methods in N dimensions;
Operator splitting;
A two–dimensional PDE;
Solving a PDDE
13. Valuation: the Monte Carlo method
The basic Monte Carlo method;
Speed–up methods;
Sampling issues;
Simulation methods for HJM m odels
14. Lattice methods
Introduction to lattice methods;
Issues in constructing a lattice;
Examples of lattice methods;
Calibration to market prices;
The explicit finite difference method;
Lattices and the Monte Carlo method;
Non–recombining lattices;
Conclusions
Part IV Calibration and estimation
15. Modelling the yield curve
Stripping the yield curve;
Fitting using parameterised curves;
Fitting the yield curve using splines;
Nelson and Siegel curves;
Comparison of families of curves;
Kernel methods of yield curve estimations;
LP and regression methods
16. Principal components analysis
Volatility structures;
Identifying empirical volatility factors;
Calibrating whole yield curve methods;
Processes on manifolds;
Analysis of dynamical systems;
Conclusions
17. Estimation methods: GMM and ML
GMM estimation;
Implementation issues;
The efficient method of moments (EMM);
Maximum likelihood methods;
Hierarchy of procedures
18. Further estimation methods
Introduction;
Filtering approaches to estimation;
The extended Kalman Filter;
GARCH models;
Extensions of GARCH;
Interest rate models and GARCH;
Artificial neural nets (ANNs)
19. Interest rates and implied pricing
Problems with interest rate models;
Key relationships;
The interest rate case;
The implied pricing method;
Regularisation functions;
Patching tails onto pricing densities
Afterword
Notation
Glossary of mathematical, market and model terms
References
Author Index
Subject Index

Nota biograficzna:
JESSICA JAMES is Head of Research for Bank One′s Strategic Risk Management group, based in the UK. Jessica started life as a physicist at Manchester University and completed her DPhil in Theoretical Atomic and Nuclear Physics at Christ Church, Oxford, under Professor Sandars. After a year as a college lecturer at Trinity, Oxford, she began