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Online Link to this Reading: N/A
Topics Covered in this Reading:
Categorization of Approaches to Term Structure Modeling
Risk Neutral Probabilities: The Derivative Pricing Probability Measure
Realistic Probabilities: The Estimated Market Probability Measure
When Do I Use Each of the Modeling Approaches?
- Risk Neutral and Arbitrage Free
- Risk Neutral and Equilibrium
Using Models of Borrower Behavior with a Risk Neutral Interest Rate Model
- Realistic and Arbitrage Free
- Realistic and Equilibrium
Summary of the Four Faces
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