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How to handle negative short term rates
There is a research paper on this exact topic
Abstract:
We discuss a simple extension of the Ho and Lee model with generic time-dependent drift in which: 1) we compute bond prices analytically; 2) the yield curve is sensible and the asymptotic yield is positive; and 3) our analytical solution provides a clean and simple way of separating volatility from the drift in the short-rate process. Our extension amounts to introducing one or two reflecting barriers for the underlying Brownian motion (as opposed to the short-rate), which allows to have more realistic time-dependent drift (as opposed to constant drift). In our model the spectrum — or, roughly, the set of short-rate values contributing to bond and other claim prices — is discrete and positive. We discuss how to calibrate our model using empirical yield data by fitting three parameters and then read off the time-dependent drift.http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2562500
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Blackrock blog: Impact of negative interest rates
There seems to be some positive that comes out of this
Thanks to NYC Contact for sending
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NOTE I now post my TRADING ALERTS into my personal FACEBOOK ACCOUNT and TWITTER. Don't worry as I don't post stupid cat videos or what I eat!We at P&D are carrying out a confidential pay survey for those that use maths in their job. So far it’s had well over 4,000 responses, & takes 3-5 minutes to complete which allows us not only to publish stats on what people are paid but give you better advice when you ask us.
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