New interest rate model ensures stability and accurate pricing in markets.
The article analyzes a type of term structure model for interest rates in the financial market. The model ensures that market forward rates remain stable, positive, and tend to return to an average value. It accurately prices caps, floors, and swaptions using formulas commonly used in the market. By calibrating the model to the U.K. market, researchers found that it accurately reflects the pricing of caps and swaptions, as well as the historical correlation between forward rates.