Interest-Rate Models

In this article we will describe some of the main developments in interest-rate modelling since Black & Scholes’ (1973) and Merton’s (1973) original articles on the pricing of equity derivatives. In particular, we will focus on continuoustime, arbitrage-free models for the full term structure of interest rates. Other models which model a limited number of key interest rates or which operate in discrete time (for example, the Wilkie (1995) model) will be considered elsewhere. Additionally, more detailed accounts of affine term-structure models and market models are given elsewhere in this volume.