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Title: | Valuation of cash flows under random rates of interest: A linear algebraic approach |
Authors: | Date, P Mamon, R Wang, C |
Keywords: | Stochastic interest rate models;Linear systems;Uniformly convergent approximation |
Issue Date: | 2007 |
Publisher: | Elsevier |
Citation: | Insurance: Mathematics and Economics, 41(1): 84–95, Jul 2007 |
Abstract: | This paper reformulates the classical problem of cash flow valuation under stochastic discount factors into a system of linear equations with random perturbations. Using convergence results, a sequence of uniform approximations is developed. The new formulation leads to a general framework for deriving approximate statistics of cash flows for a broad class of models of stochastic interest rate process. We show applications of the proposed method by pricing default-free and defaultable cash flows. The methodology developed in this paper is applicable to a variety of uncertain cash flow analysis problems. |
URI: | http://bura.brunel.ac.uk/handle/2438/493 |
DOI: | http://dx.doi.org/10.1016/j.insmatheco.2006.10.001 |
Appears in Collections: | Dept of Mathematics Research Papers Mathematical Sciences |
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