## Application of statistical mechanics methodology to term-structure bond-pricing models (1991)

Venue: | Mathl. Comput. Modelling |

Citations: | 32 - 28 self |

### BibTeX

@ARTICLE{Ingber91applicationof,

author = {Lester Ingber and Michael F. Wehner and George M. Jabbour and Theodore M. Barnhill},

title = {Application of statistical mechanics methodology to term-structure bond-pricing models},

journal = {Mathl. Comput. Modelling},

year = {1991},

volume = {15},

pages = {77--98}

}

### OpenURL

### Abstract

Recent work in statistical mechanics has developed new analytical and numerical techniques to solve coupled stochastic equations. This paper applies the very fast simulated re-annealing and path-integral methodologies to the estimation of the Brennan and Schwartz two-factor term structure model. It is shown that these methodologies can be utilized to estimate more complicated n-factor nonlinear models. 1. CURRENT MODELS OF TERM STRUCTURE The modern theory of term structure of interest rates is based on equilibrium and arbitrage models in which bond prices are determined in terms of a few state variables. The one-factor models of Cox, Ingersoll and Ross (CIR) [1-4], and the two-factor models of Brennan and Schwartz (BS) [5-9] have been instrumental in the development of the valuation of interest dependent securities. The assumptions of these models include: • Bond prices are functions of a number of state variables, one to several, that follow Markov processes. • Inv estors are rational and prefer more wealth to less wealth. • Inv estors have homogeneous expectations.