Approximating Interest Rate Distributions Within 2FBK
Document ID: 2007-15 (previously 2007/004)
Published on: 1st April 2007
Author: David Roseburgh, Steven Morrison
Within the 2 factor Black Karasinski model the short term interest rate (or short rate), r(t), is log normally distributed. However, the distributions of other measures of the interest rate, which are calculated conditionally on the present short rate, are not known. In this note, we assume that forward rates, spot rates and par yields are also lognormally distributed, and use this assumption to approximate their distribution at various time horizons.
