ABSTRACT
This chapter provides a catalogue of a number of well-known models of interest rates. The main focus is on univariate stochastic differential equations (SDEs) or one-factor models as they are called in the financial literature because only one state variable (or factor) is used to describe variations in the interest rate. The chapter describes models that give rise to normally distributed interest rates. It extends these models to non-Gaussian interest rates by allowing the drift and diffusion parameters to be time-dependent functions. The chapter provides a brief introduction to a very broad class of multivariate SDEs or multifactor models, where additional variables are used to model the interest rate. It also considers stochastic volatility models, where one aims at modelling the volatility by considering a function of the volatility as a state variable.
