Stylised Properties of the Interest Rate Term Structure Under The Benchmark Approach

Market models which re ect stylised properties of the interest rate term structure are widely used for modelling and pricing interest rate derivatives. We consider a market model involving the short rate and a diversied global stock index. We illustrate the stylised properties of the interest rate term structure implied by a system of stochastic dierential equations specifying the short rate and the discounted stock index under the benchmark approach. Comparison with empirical evidence demonstrates the explanatory power of a discounted stock index modelled by a squared Bessel process.