Conditional Gaussian models of the term structure of interest rates (Q1409833)

A new family of yield curve models is proposed in which increments in the log ``one-plus-interest-rates'' are assumed to be one-step conditionally Gaussian. A non-arbitrage condition is derived for such models. It is demonstrated that the discrete-time models of this type can be imbedded in continuous time models of the whole yield curve. The valuation of ``non-kernel'' claims is described. Derivatives valuation and conditional heteroscedasticity models are considered as examples.