Negative Bond Prices Within Extended 2FBK
Document ID: 2007-316 (previously 2007/002)
Published on: 1st March 2007
Author: David Roseburgh
Under certain conditions (which are so far not well understood) zero coupon bond prices within the extended 2 factor Black Karasinski model (2fBKExt) can be negative. This is more prevalent when simulations are run on a monthly timestep. As well as being economically incoherent, this results in NaN outputs for spot rates, forward rates and par yields.
