Author: Michael W. BrandtPublisher:
ISBN:
Category :
Languages : es
Pages : 36
Book Description
Time-consistent no-arbitrage models of the term structure
Author: Michael W. BrandtA Simple Binomial No-arbitrage Model of the Term Structure
Author: Thomas J. O'BrienPublisher:
ISBN:
Category : Bonds
Languages : en
Pages : 80
Book Description
Fractional Term Structure Models
Author: Alberto OhashiModeling the Term Structure of Interest Rates
Author: Rajna GibsonPublisher: 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.
An Arbitrage-Free Two-Factor Model of the Term Structure of Interest Rates
Author: Marti G. SubrahmanyamPublisher:
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.
An Arbitrage-free Generalized Nelson-Siegel Term Structure Model
Author: Jens H. E. ChristensenPublisher:
ISBN:
Category : Bonds
Languages : en
Pages : 32
Book Description
The Svensson generalization of the popular Nelson-Siegel term structure model is widely used by practitioners and central banks. Unfortunately, like the original Nelson-Siegel specification, this generalization, in its dynamic form, does not enforce arbitrage-free consistency over time. Indeed, we show that the factor loadings of the Svensson generalization cannot be obtained in a standard finance arbitrage-free affine term structure representation. Therefore, we introduce a closely related generalized Nelson-Siegel model on which the no-arbitrage condition can be imposed. We estimate this new arbitrage-free generalized Nelson-Siegel model and demonstrate its tractability and good in-sample fit.
A Review of the Dynamic Default-Free Term Structure Models
Author: Ako DoffouPublisher:
ISBN:
Category :
Languages : en
Pages : 27
Book Description
Enormous progress has been made by academics and finance practitioners alike in modeling the dynamics of the term structure of interest rates in the past 35 years. This paper extends Yan (2001). The dynamics of the term structure of interest rates are critical in assessing prices and hedging portfolios of fixed-income derivative instruments. This paper reviews the theoretical development of the dynamic models of the default-free term structure and their applications in pricing interest rate options. Equilibrium models and their multifactor extensions are examined. These models offer the economic intuition linking the term structure to economic fundamentals. These models also constitute a framework of the arbitrage models which price interest rate derivatives using the market prices of bonds. Recent studies expand this framework, directly model observable market rates, incorporate an internally consistent correlation structure, use pricing factors as observable portfolios of zero-coupon yields acting as state variables, offer a discrete time setting with recursive closed form solutions for zero coupon bonds, have unconstrained state dependence of the market prices of risk, build in smoothness restrictions on the factor loadings, and are driven by state vectors with unspanned macro risks.
Term Structure of Interest Rates
Author: Zbynek StorkPublisher: LAP Lambert Academic Publishing
ISBN: 9783659563881
Category :
Languages : en
Pages : 124
Book Description
Macro-finance modelling is an increasingly popular topic. Various approaches have been developing rapidly, usually using econometric techniques. This book focuses on structural approach to an analysis of average yield curve and its dynamics using macroeconomic factors. An underlying model is based on basic Dynamic Stochastic General Equilibrium (DSGE) approach. Log-linearized solution of the model is the key for derivation of yield curve and its main determinants - pricing kernel, price of risk and affine term structure of interest rates - based on no-arbitrage assumption. The book presents a consistent derivation of a structural macro-finance model, with a reasonable computational burden that allows for time varying term premia. A simple VAR model, widely used in macro-finance literature, serves as a benchmark. The two models are briefly compared and analysis shows their ability to fit an average yield curve observed from the data. It also presents a possible importance of this issue for monetary and fiscal institutions. The book should help shed some light on the use of DSGE framework within macro-finance modelling and should be useful for students and researchers in this field.
Empirical Dynamic Asset Pricing
Author: Kenneth J. SingletonPublisher: Princeton University Press
ISBN: 1400829232
Category : Business & Economics
Languages : en
Pages : 497
Book Description
Written by one of the leading experts in the field, this book focuses on the interplay between model specification, data collection, and econometric testing of dynamic asset pricing models. The first several chapters provide an in-depth treatment of the econometric methods used in analyzing financial time-series models. The remainder explores the goodness-of-fit of preference-based and no-arbitrage models of equity returns and the term structure of interest rates; equity and fixed-income derivatives prices; and the prices of defaultable securities. Singleton addresses the restrictions on the joint distributions of asset returns and other economic variables implied by dynamic asset pricing models, as well as the interplay between model formulation and the choice of econometric estimation strategy. For each pricing problem, he provides a comprehensive overview of the empirical evidence on goodness-of-fit, with tables and graphs that facilitate critical assessment of the current state of the relevant literatures. As an added feature, Singleton includes throughout the book interesting tidbits of new research. These range from empirical results (not reported elsewhere, or updated from Singleton's previous papers) to new observations about model specification and new econometric methods for testing models. Clear and comprehensive, the book will appeal to researchers at financial institutions as well as advanced students of economics and finance, mathematics, and science.
An Arbitrage-Free Generalized Nelson-Siege Term Structure Model
Author: Jens Henrik Eggert ChristensenPublisher:
ISBN:
Category :
Languages : en
Pages : 30
Book Description
The Svensson generalization of the popular Nelson-Siegel term structure model is widely used by practitioners and central banks. Unfortunately, like the original Nelson-Siegel specification, this generalization, in its dynamic form, does not enforce arbitrage-free consistency over time. Indeed, we show that the factor loadings of the Svensson generalization cannot be obtained in a standard finance arbitrage-free affine term structure representation. Therefore, we introduce a closely related generalized Nelson-Siegel model on which the no-arbitrage condition can be imposed. We estimate this new arbitrage-free generalized Nelson-Siegel model and demonstrate its tractability and good in-sample fit.