A Mathematical Model for the Gilt-Edged Market

Abstract

Synopsis This paper investigates what general form of price model is required to represent a market that is in equilibrium under switching action and describes how a special case of this general price model can be applied to the gilt-edged market, with particular emphasis on long-dated stocks. Applications of the mathematical model are then developed in a form that could be used by a life office or pension fund for the management of a portfolio of long-dated British Government stocks. Finally, a comparison is made between conventional yield curve methods of analysis and methods based on this mathematical model.