Level-dependent volatility in jumping short-rate models

This dissertation constructs a no-arbitrage term structure with deterministically timed randomly sized jumps to price interest rate contingent claims while accounting for level-dependent volatility. This dissertation will price such claims using an implicit finite difference scheme to implement a modelling framework that prices bonds, bond options and caplets with scheduled shocks to the short-term interest rate to simulate macroeconomic announcements and other sudden developments. This dissertation found that the prices derived from the implicit finite difference scheme agree with those derived from Monte-Carlo simulations and, where applicable, analytical solutions. Moreover, this dissertation shows how innovations in the short-term rate affect the valuations of interest rate contingent claims.

Grantor dc:publisher.institution

Department of Finance and Tax

Year dc:date.issued

2025

Author dc:creator

• Chitambo, Nigel Elton Nyasha

Advisor dc:contributor.advisor

• Backwell, Alexander

• finance
• tax

Handle dc:identifier.uri

http://hdl.handle.net/11427/41550

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/41550