• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Chapter 18 - Term structure of interest rates

X

Xiaoran Gao

Member
Hi,

I have 2 questions on this topic:
1) Why "Single factor short-rate models mean that all maturities behave in the same way - there is no independence"?
2) On page 32 of the CMP, it states that by the state price deflator approach, r(t) = - \mu_A(t). Is there a way to intuitively understand this formula? Or how to derive it formally?

Would appreciate any thoughts on this. Thanks!
 
1) The single factor models are driven by a single standard Brownian motion engine, and so there just isn't enough flexibility to generate yield curves that can twist - all maturities behave in the same way (ie they either all move up or all move down). A two-factor model, using two standard Brownian motions, can be constructed to overcome this limitation, but it's a lot harder to deal with.

2) The state-price deflator content hasn't been in this chapter for some years (it was removed in 2022). Check to make sure you're using the most up-to-date version of the course.
 
You must log in or register to reply here.
Back
Top