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Author: T.S. Ho Publisher: ISBN: Category : Languages : en Pages : 39
Book Description
We derive a no-arbitrage model of the term structure in which any two futures rates act as factors. The term structure shifts and tilts as the factor rates vary. The cross-sectional properties of the model derive from the solution of a two-dimensional ARMA process for the short rate which exhibits mean reversion and a lagged memory parameter. We show that the correlation of the factor rates is restricted by the no-arbitrage conditions of the model. Hence in a multiple-factor model it is not valid to independently choose both the mean reversion, volatility and correlation parameters. The term-structure model, derived here, can be used to value options on bonds and swaps or to generate term structure scenarios for the risk management of portfolios of interest-rate derivatives.
Author: T.S. Ho Publisher: ISBN: Category : Languages : en Pages : 39
Book Description
We derive a no-arbitrage model of the term structure in which any two futures rates act as factors. The term structure shifts and tilts as the factor rates vary. The cross-sectional properties of the model derive from the solution of a two-dimensional ARMA process for the short rate which exhibits mean reversion and a lagged memory parameter. We show that the correlation of the factor rates is restricted by the no-arbitrage conditions of the model. Hence in a multiple-factor model it is not valid to independently choose both the mean reversion, volatility and correlation parameters. The term-structure model, derived here, can be used to value options on bonds and swaps or to generate term structure scenarios for the risk management of portfolios of interest-rate derivatives.
Author: Marti G. Subrahmanyam Publisher: ISBN: Category : Languages : en Pages : 40
Book Description
We build a no-arbitrage model of the term structure, using two stochastic factors on each date, the short-term interest rate and the forward premium. The model is essentially an extension to two factors of the lognormal interest rate model of Black-Karazinski. It allows for mean reversion in the short rate and in the forward premium. The method is computationally efficient for several reasons. First, interest rates are defined on a bankers' discount basis, as linear functions of zero-coupon bond prices, enabling us to use the no-arbitrage condition to compute bond prices without resorting to cumbersome iterative methods. Second, the multivariate-binomial methodology of Ho-Stapleton-Subrahmanyam is extended so that a multi-period tree of rates with the no-arbitrage property can be constructed using analytical methods. The method uses a recombining two-dimensional binomial lattice of interest rates that minimizes the number of states and term structures. Third, the problem of computing a large number of term structures is simplified by using a limited number of bucket rates in each term structure scenario. In addition to these computational advantages, a key feature of the model is that it is consistent with the observed term structure of volatilities implied by the prices of interest rate caps and floors. We illustrate the use of the model by pricing American-style and Bermudan-style options on interest rates. Option prices for realistic examples using forty time periods are shown to be computable in seconds.
Author: Rajna Gibson Publisher: Now Publishers Inc ISBN: 1601983727 Category : Business & Economics Languages : en Pages : 171
Book Description
Modeling the Term Structure of Interest Rates provides a comprehensive review of the continuous-time modeling techniques of the term structure applicable to value and hedge default-free bonds and other interest rate derivatives.
Author: Amir Yaron Publisher: ISBN: Category : Languages : en Pages : 48
Book Description
We develop and empirically explore a model of the term structure that captures as well as possible the time-series dynamics of a set of state variables and fits exactly the date-to-date cross-sections of bond prices. We construct our model in two stages. In the first stage we use a flexible time-series model to describe the dynamics of the state variables. In the second stage, we infer for each date in the sample the pricing kernel from the term structure of interest rates using conditional moments implied by the restriction of no-arbitrage. We estimate a number of two-factor models for U.S. term structure data and use various in- and out-of-sample measures to evaluate the relative importance of well-specified factor dynamics and non-linearities in the pricing kernel. We find that both aspects are crucial for out-of-sample pricing. Specifically, our results lend support to quadratic term structure models.
Author: Michiel de Pooter Publisher: Rozenberg Publishers ISBN: 9051709153 Category : Languages : en Pages : 286
Book Description
This dissertation consists of a collection of studies on two areas in quantitative finance: asset return volatility and the term structure of interest rates. The first part of this dissertation offers contributions to the literature on how to test for sudden changes in unconditional volatility, on modelling realized volatility and on the choice of optimal sampling frequencies for intraday returns. The emphasis in the second part of this dissertation is on the term structure of interest rates.
Author: Thomas S. Y. Ho Publisher: Oxford University Press ISBN: 9780199727704 Category : Business & Economics Languages : en Pages : 770
Book Description
The essential premise of this book is that theory and practice are equally important in describing financial modeling. In it the authors try to strike a balance in their discussions between theories that provide foundations for financial models and the institutional details that provide the context for applications of the models. The book presents the financial models of stock and bond options, exotic options, investment grade and high-yield bonds, convertible bonds, mortgage-backed securities, liabilities of financial institutions--the business model and the corporate model. It also describes the applications of the models to corporate finance. Furthermore, it relates the models to financial statements, risk management for an enterprise, and asset/liability management with illiquid instruments. The financial models are progressively presented from option pricing in the securities markets to firm valuation in corporate finance, following a format to emphasize the three aspects of a model: the set of assumptions, the model specification, and the model applications. Generally, financial modeling books segment the world of finance as "investments," "financial institutions," "corporate finance," and "securities analysis," and in so doing they rarely emphasize the relationships between the subjects. This unique book successfully ties the thought processes and applications of the financial models together and describes them as one process that provides business solutions. Created as a companion website to the book readers can visit www.thomasho.com to gain deeper understanding of the book's financial models. Interested readers can build and test the models described in the book using Excel, and they can submit their models to the site. Readers can also use the site's forum to discuss the models and can browse server based models to gain insights into the applications of the models. For those using the book in meetings or class settings the site provides Power Point descriptions of the chapters. Students can use available question banks on the chapters for studying.
Author: Frank J. Fabozzi, CFA Publisher: John Wiley & Sons ISBN: 9781883249175 Category : Business & Economics Languages : en Pages : 408
Book Description
Advances in Fixed Income Valuation Modeling and Risk Management provides in-depth examinations by thirty-one expert research and opinion leaders on topics such as: problems encountered in valuing interest rate derivatives, tax effects in U.S. government bond markets, portfolio risk management, valuation of treasury bond futures contract's embedded options, and risk analysis of international bonds.
Author: Marcus Schulmerich Publisher: Springer Science & Business Media ISBN: 3642126626 Category : Business & Economics Languages : en Pages : 400
Book Description
After the ?rst edition of this book was published in early 2005, the world has changed dramatically and at a pace never seen before. The changes that - curred in 2008 and 2009 were completely unthinkable two years before. These changes took place not only in the Finance sector, the origin of the crisis, but also, as a result, in other economic sectors like the automotive sector. Governments now own substantial parts, if not majorities, in banks or other companies which recorded losses of double digit billions of USD in 2008. 2008 saw the collapse of leading stand-alone U. S. investment banks. In many co- tries interest rates fell close to zero. What has happend? While the economy showed strong growth in 2004 to 2006, the Subprime or Credit Crisis changed the picture completely. What started in the U. S. ho- ing market in late 2006 became a full-?edged global ?nancial crisis and has a?ected ?nancial markets around the world. A decline in U. S. house prices and increasing interest rates caused a higher rate of subprime mortgage delinqu- cies in the U. S. and, due to the wide distribution of securitized assets, had a negative e?ect on other markets. As a result, markets realized that risks had been underestimated and volatility increased. This development culminated in the bankruptcy of the investment bank Lehman Brothers in mid September 2008.
Author: Aparna Gupta Publisher: CRC Press ISBN: 1439835950 Category : Business & Economics Languages : en Pages : 518
Book Description
The challenges of the current financial environment have revealed the need for a new generation of professionals who combine training in traditional finance disciplines with an understanding of sophisticated quantitative and analytical tools. Risk Management and Simulation shows how simulation modeling and analysis can help you solve risk managemen
Author: T.S. Ho
Author: T.S. Ho
Author: Marti G. Subrahmanyam
Author: Rajna Gibson
Author: Amir Yaron
Author: Michiel de Pooter
Author: Thomas S. Y. Ho
Author: Frank J. Fabozzi, CFA
Author: David Meiselman
Author: Marcus Schulmerich
Author: Aparna Gupta