Many exotic derivatives do not have closed-form valuation equations, and must be priced using approximation methods. Where they can be applied, standard lattice techniques based on binomial and trinomial trees will achieve correct valuations asymptotically. They can also generally handle...

This paper investigates the implications of mixtures of affine, quadratic, and nonlinear models for the term structure of volatility. The dynamics of the term structure of interest rates appear to exhibit pronounced time-varying or stochastic volatility. Ahn, Dittmar, and Gallant (2000) provide...

Recent nonparametric estimation studies pioneered by Ait-Sahalia (1996a, 1996b) document that the diffusion of the short rate is similar to the parametric function, r1.5, estimated by Chan, Karolyi, Longstaff, and Sanders (1992) whereas the drift is substantially nonlinear in the short rate....