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Mathematics 2018, 6(5), 70; https://doi.org/10.3390/math6050070

On Short-Term Loan Interest Rate Models: A First Passage Time Approach

1
Dipartimento di Scienze Economiche e Statistiche, University of Salerno, 84084 Fisciano, SA, Italy
2
Dipartimento di Informatica, University of Salerno, 84084 Fisciano, SA, Italy
*
Author to whom correspondence should be addressed.
Received: 2 February 2018 / Revised: 23 April 2018 / Accepted: 25 April 2018 / Published: 3 May 2018
(This article belongs to the Special Issue Stochastic Processes with Applications)
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Abstract

In this paper, we consider a stochastic diffusion process able to model the interest rate evolving with respect to time and propose a first passage time (FPT) approach through a boundary, defined as the “alert threshold”, in order to evaluate the risk of a proposed loan. Above this alert threshold, the rate is considered at the risk of usury, so new monetary policies have been adopted. Moreover, the mean FPT can be used as an indicator of the “goodness” of a loan; i.e., when an applicant is to choose between two loan offers, s/he will choose the one with a higher mean exit time from the alert boundary. An application to real data is considered by analyzing the Italian average effect global rate by means of two widely used models in finance, the Ornstein-Uhlenbeck (Vasicek) and Feller (Cox-Ingersoll-Ross) models. View Full-Text
Keywords: loan interest rate regulation; diffusion model; first passage time (FPT) loan interest rate regulation; diffusion model; first passage time (FPT)
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Albano, G.; Giorno, V. On Short-Term Loan Interest Rate Models: A First Passage Time Approach. Mathematics 2018, 6, 70.

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