Title: Equilibrium interest rate models for the Indian Government security market

Authors: Sunrita Chaudhuri; Alok Pandey

Addresses: School of Management, GD Goenka University, Gurgaon, Haryana, India ' School of Management, GD Goenka University, Gurgaon, Haryana, India

Abstract: After the financial sector reforms of the 1990s, interest rates in the debt segment are increasingly being determined by the market. Active participants in the debt market, therefore, need to use appropriate models to ensure fair pricing of interest rate related products and their derivatives. The two most widely used equilibrium models are Vasicek and Cox Ingersoll and Ross model. This study estimates the parameters of the Vasicek and Cox and Ingersoll and Ross model using 91Days T-Bills data from the Indian market. Thereafter the term structure of interest rates is simulated for future periods. Finally, the model parameters are used to price interest rate related instruments and derivative instruments.

Keywords: Vasicek model; Cox Ingersoll and Ross model; calibration; maximum likelihood estimation; MLE; ordinary least squares; OLS; pricing of interest rate options.

DOI: 10.1504/IJFMD.2024.140636

International Journal of Financial Markets and Derivatives, 2024 Vol.10 No.1, pp.70 - 86

Received: 20 Sep 2021
Accepted: 01 Dec 2021
Published online: 29 Aug 2024 *

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