On the Stability of Log-normal Interest Rate Models and the Pricing of Eurodollar Futures

Abstract

The lognormal distribution assumption for the term structure of interest is the most natural way to exclude negative spot and forward rates. However, imposing this assumption on the continuously compounded interest rate has a serious drawback: expected rollover returns are innnite even if the rollover period is arbitrarily short. As a consequence such… (More)

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