
 Fixed Income Pricing by Qiang Dai of New York University, and July 1, 2002 Introduction: This chapter surveys the literature on fixedincome pricing models, including dynamic term structure models (DTSMs) and interest rate sensitive, derivative pricing models. This literature is vast with both the academic and practitioner communities having proposed a wide variety of models and modelselection criteria. Central to all pricing models, implicitly or explicitly, are: (i) the identity of the state vector: whether it is latent or observable and, in the latter case, which observable series; (ii) the law of motion (conditional distribution) of the state vector under the pricing measure; and (iii) the functional dependence of the shortterm interest rate on this state vector. A primary objective, then, of research on fixedincome pricing has been the selection of these ingredients to capture relevant features of history, given the objectives of the modeler, while maintaining tractability, given available data and computational algorithms. Accordingly, we overview alternative conceptual approaches to fixedincome pricing, highlighting some of the tradeoffs that have emerged in the literature between the complexity of the probability model for the state, data availability, the pricing objective, and the tractability of the resulting model. This paper is republished as Ch.20 in... Books Referenced in this paper: (what is this?) 