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Author: Massoud Heidari Publisher: ISBN: Category : Languages : en Pages : 44
Book Description
Dynamic term structure models price interest rate options based on the model-implied fair values of the yield curve, ignoring any pricing residuals on the yield curve that are either from model approximations or market imperfections. In contrast, option pricing in practice often takes the market observed yield curve as given and focuses exclusively on the specification of the volatility structure of forward rates. Thus, if any errors exist on the observed yield curve, they will be carried over permanently. In this paper, we propose an m+n model structure that bridges the gap between the two approaches and consistently prices both interest rates and interest rate options. The first m factors capture the systematic movement of the yield curve, whereas the latter n factors capture the impacts of the yield curve residuals on option pricing. We estimate a 3+3 Gaussian affine example using eight years of data on U.S. dollar LIBOR, swap rates, and interest rate caps. The model performs well in pricing both interest rates and interest rate caps. Furthermore, estimation shows that small residuals on the yield curve can have large impacts on pricing interest rate caps. Under the estimated model, the three yield curve factors explain over 99 percent of the variation on the yield curve, but account for less than 50 percent of the variation on cap implied volatilities. Incorporating the three residual factors improves the explained variance on cap implied volatility to over 99 percent.
Author: Massoud Heidari Publisher: ISBN: Category : Languages : en Pages : 44
Book Description
Dynamic term structure models price interest rate options based on the model-implied fair values of the yield curve, ignoring any pricing residuals on the yield curve that are either from model approximations or market imperfections. In contrast, option pricing in practice often takes the market observed yield curve as given and focuses exclusively on the specification of the volatility structure of forward rates. Thus, if any errors exist on the observed yield curve, they will be carried over permanently. In this paper, we propose an m+n model structure that bridges the gap between the two approaches and consistently prices both interest rates and interest rate options. The first m factors capture the systematic movement of the yield curve, whereas the latter n factors capture the impacts of the yield curve residuals on option pricing. We estimate a 3+3 Gaussian affine example using eight years of data on U.S. dollar LIBOR, swap rates, and interest rate caps. The model performs well in pricing both interest rates and interest rate caps. Furthermore, estimation shows that small residuals on the yield curve can have large impacts on pricing interest rate caps. Under the estimated model, the three yield curve factors explain over 99 percent of the variation on the yield curve, but account for less than 50 percent of the variation on cap implied volatilities. Incorporating the three residual factors improves the explained variance on cap implied volatility to over 99 percent.
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: Olesya V. Grishchenko Publisher: ISBN: Category : Languages : en Pages : 65
Book Description
Bond returns are time-varying and predictable. What economic forces drive this variation? To answer this long-standing question, we propose a consumption-based model with recursive preferences, long-run risks, and inflation non-neutrality. Our model offers two important insights. First, our model matches well the post-1990 nominal upward-sloping U.S. Treasury yield curve. Second, consistent with our model's implication, variance risk premium based on the U.S. interest rate derivatives data emerges as a strong predictor for short-horizon Treasury excess returns, above and beyond the predictive power of other popular factors. In the model equilibrium, the variance risk premium is related to the short-run risks in the economy, while standard forward-rate-based factors are associated with long-run risks in the economy.
Author: Frank J. Fabozzi Publisher: John Wiley & Sons ISBN: 047144698X Category : Business & Economics Languages : en Pages : 530
Book Description
This ultimate guide contains an excellent blend of theory and practice This comprehensive guide covers various aspects of model building for fixed income securities and derivatives. Filled with expert advice, valuable insights, and advanced modeling techniques, Interest Rate, Term Structure, and Valuation Modeling is a book that all institutional investors, portfolio managers, and risk professionals should have. John Wiley & Sons, Inc. is proud to be the publisher of the esteemed Frank J. Fabozzi Series. Comprising nearly 100 titles-which include numerous bestsellers—The Frank J. Fabozzi Series is a key resource for finance professionals and academics, strategists and students, and investors. The series is overseen by its eponymous editor, whose expert instruction and presentation of new ideas have been at the forefront of financial publishing for over twenty years. His successful career has provided him with the knowledge, insight, and advice that has led to this comprehensive series. Frank J. Fabozzi, PhD, CFA, CPA, is Editor of the Journal of Portfolio Management, which is read by thousands of institutional investors, as well as editor or author of over 100 books on finance for the professional and academic markets. Currently, Dr. Fabozzi is an adjunct Professor of Finance at Yale University's School of Management and on the board of directors of the Guardian Life family of funds and the Black Rock complex of funds.
Author: Jörg Kienitz Publisher: Springer ISBN: 1137360194 Category : Business & Economics Languages : en Pages : 261
Book Description
This book on Interest Rate Derivatives has three parts. The first part is on financial products and extends the range of products considered in Interest Rate Derivatives Explained I. In particular we consider callable products such as Bermudan swaptions or exotic derivatives. The second part is on volatility modelling. The Heston and the SABR model are reviewed and analyzed in detail. Both models are widely applied in practice. Such models are necessary to account for the volatility skew/smile and form the fundament for pricing and risk management of complex interest rate structures such as Constant Maturity Swap options. Term structure models are introduced in the third part. We consider three main classes namely short rate models, instantaneous forward rate models and market models. For each class we review one representative which is heavily used in practice. We have chosen the Hull-White, the Cheyette and the Libor Market model. For all the models we consider the extensions by a stochastic basis and stochastic volatility component. Finally, we round up the exposition by giving an overview of the numerical methods that are relevant for successfully implementing the models considered in the book.
Author: Lin Chen Publisher: Springer ISBN: Category : Business & Economics Languages : en Pages : 178
Book Description
This book presents a three-factor model of the term structure of interest rates in which the short mean and volatility of the short rate are stochastic. By this specification, this model has nested many of the term structure models in the existing literature. Based on this rather realistic and sophisticated model, the book further shows how to price interest rate derivatives and to formulate risk management scheme. The model is potentially useful for practical purposes such as pricing bonds, hedging bond portfolios, and formulating dynamic trading strategies. The model could also be used to perform other types of security analyses, such as the valuation of mortgage-backed securities, synthetic security construction, immunization, portfolio indexing, asset/liability management, etc.
Author: Frank J. Fabozzi, CFA Publisher: John Wiley & Sons ISBN: 9780471220947 Category : Business & Economics Languages : en Pages : 536
Book Description
This ultimate guide contains an excellent blend of theory and practice This comprehensive guide covers various aspects of model building for fixed income securities and derivatives. Filled with expert advice, valuable insights, and advanced modeling techniques, Interest Rate, Term Structure, and Valuation Modeling is a book that all institutional investors, portfolio managers, and risk professionals should have. John Wiley & Sons, Inc. is proud to be the publisher of the esteemed Frank J. Fabozzi Series. Comprising nearly 100 titles-which include numerous bestsellers—The Frank J. Fabozzi Series is a key resource for finance professionals and academics, strategists and students, and investors. The series is overseen by its eponymous editor, whose expert instruction and presentation of new ideas have been at the forefront of financial publishing for over twenty years. His successful career has provided him with the knowledge, insight, and advice that has led to this comprehensive series. Frank J. Fabozzi, PhD, CFA, CPA, is Editor of the Journal of Portfolio Management, which is read by thousands of institutional investors, as well as editor or author of over 100 books on finance for the professional and academic markets. Currently, Dr. Fabozzi is an adjunct Professor of Finance at Yale University's School of Management and on the board of directors of the Guardian Life family of funds and the Black Rock complex of funds.
Author: Peter Kohl-Landgraf Publisher: BoD – Books on Demand ISBN: 3833495375 Category : Derivative securities Languages : en Pages : 222
Book Description
The Libor Market Model and its several extensions can be seen as state of the art in interest rate modeling. However, due to the ever increasing complexity of interest rate products, the high dimensionality of this approach starts to reach its limits from the computational side. This book is mainly concerned with a class of Markovian Yield Curve Models which try to overcome that disadvantage as they enable a low-dimensional deterministic and fast PDE valuation. The objective of this book is thereby threefold: - To illuminate in a compact way the connection between stochastic processes and partial differential equations as well as review the key features of arbitrage-free pricing. - To embed the here analyzed Markovian model class into the entire framework of interest rate models. - To present and implement robust numerical schemes, which enable an efficient computational treatment of risk-neutral product valuation by using PDE methods.
Author: John Knight Publisher: ISBN: Category : Languages : en Pages : 55
Book Description
Diffusion functions in term-structure models are measures of uncertainty about future price movements and are directly related to the risk associated with holding financial securities. Correct specification of diffusion functions is crucial in pricing options and other derivative securities. In contrast to the standard parametric two-factor models, we propose a non-parametric two-factor term-structure model that imposes no restrictions on the functional forms of the diffusion functions. Hence, this model allows for maximum flexibility when fitting diffusion functions into data. A non-parametric procedure is developed for estimating the diffusion functions, based on the discretely sampled observations. The convergence properties and the asymptotic distributions of the proposed non-parametric estimators of the diffusion functions with multivariate dimensions are also obtained. Based on U.S. data, the non-parametric prices of the bonds and bond options are computed and compared with those calculated under an alternative parametric model. The empirical results show that the non-parametric model generates significantly different prices for the derivative securities.
Author: Massoud Heidari
Author: Massoud Heidari
Author: Rajna Gibson
Author: Olesya V. Grishchenko
Author: Frank J. Fabozzi
Author: Jörg Kienitz
Author: Lin Chen
Author: Frank J. Fabozzi, CFA
Author: Peter Kohl-Landgraf
Author: David Meiselman
Author: John Knight