Uncertain term structure model of interest rate

Abstract

Term structure models describe the evolution of the yield curve through time, without considering the influence of risk, tax, etc. Recently, uncertain processes were initialized and applied to option pricing and currency model. Under the assumption of short interest rate following uncertain processes, this study investigates the term-structure equation. This equation is first derived for valuing zero-coupon bond. Finally, analytic solutions of the uncertain interest rate equation are given when the process of interest rate is assumed to be the uncertain counterparts of the Ho-Lee model and Vasicek model, respectively.