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of the European Council for Modelling and Simulation

Title:	*Indexed Bonds With Mean-Reverting Risk Factors*
Authors:	Attila A. Vig, Agnes Vidovics-Dancs
Published in:	(2017).ECMS 2017 Proceedings Edited by: Zita Zoltay Paprika, Péter Horák, Kata Váradi, Péter Tamás Zwierczyk, Ágnes Vidovics-Dancs, János Péter Rádics European Council for Modeling and Simulation. doi:10.7148/2017 ISBN: 978-0-9932440-4-9/ ISBN: 978-0-9932440-5-6 (CD) 31st European Conference on Modelling and Simulation, Budapest, Hungary, May 23^rd – May 26^th, 2017
Citation format:	Attila A. Vig, Agnes Vidovics-Dancs (2017). Indexed Bonds With Mean-Reverting Risk Factors, ECMS 2017 Proceedings Edited by: Zita Zoltay Paprika, Péter Horák, Kata Váradi, Péter Tamás Zwierczyk, Ágnes Vidovics-Dancs, János Péter Rádics European Council for Modeling and Simulation. doi: 10.7148/2017-0081
DOI:	https://doi.org/10.7148/2017-0081
Abstract:	In this paper, we focus on the value of inflation-indexed bonds in an extended short rate framework. In the model, we assume mean-reverting stochastic dynamics under the risk neutral measure for both the short interest rate and the instantaneous inflation rate. We define the zero-coupon inflation-indexed bond, and first estimate its value by Monte Carlo simulation, then deduce an analytical formula as well. We briefly touch on the yield and inflation curves the model is able to produce.
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