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|Title:||Valuation of cash flows under random rates of interest: A linear algebraic approach|
|Keywords:||Stochastic interest rate models;Linear systems;Uniformly convergent approximation|
|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.|
|Appears in Collections:||Mathematical Science|
Dept of Mathematics Research Papers
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