Business and Personal Finance Dictionary

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z 

• TERM STRUCTURE MODEL
  
  Also known as yield curve models. An assumption, or set of assumptions, used to describe future changes in interest rates over a range of maturities. The most simple term structure model is a parallel shift in rates, e.g. all rates rise by 1 percent. Implied forward rates may be the most common term structure model. More accurate models provide a systematic way to assume the random movement of the interest rates along the yield curve. These models constrain the range of movement of the rates, and the corresponding probabilities such that they are (i) internally consistent, that is, there is no riskless profitable arbitrage, and (ii) externally consistent, that is, the values of certain securities implied from the model agree with the market values. The following five term structure models are the most systemic and accurate: Vasicek, Extended Vasicek (Hull and White), Ho and Lee, Heath, Jarrow and Morton (constant volatility), and Heath, Jarrow and Morton (declining volatility).
  
  Back