Boundary Values and Finite Difference Methods for the Single Factor Term Structure Equation

Abstract

We study the classical single factor term structure equation for models that predict non-negative interest rates. For these models we develop a fast and accurate finite difference method (FD) using the appropriate boundary conditions at zero.

Key Words:

• Term structure equation
• degenerate parabolic equations
• stochastic representation
• finite difference method

Acknowledgements

Financial support was partially obtained by Ekström from the Swedish National Graduate School of Mathematics and Computing (FMB) and by Tysk from the Swedish Research Council (VR).