An Arbitrage-free Two Factor Model of the Term Structure of Interest Rates PDF Download

Author: Sandra Peterson
Publisher:
ISBN:
Category :
Languages : en
Pages : 54

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Author: T.S. Ho
Publisher:
ISBN:
Category :
Languages : en
Pages : 39

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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: Rajna Gibson
Publisher: Now Publishers Inc
ISBN: 1601983727
Category : Business & Economics
Languages : en
Pages : 171

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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: Claus Anderskov Madsen
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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Book Description
Initially we set up the new framework developed by Heath, Jarrow and Morton (1987) and specifies the process for bond-prices, spot-rates and forward-rates assuming a deterministic volatility structure. However, the main contribution of this paper is in determining the bridge between this new modelling framework and the traditional yield-curve modelling approach. In that connection we consider the following one-factor models: Cox, Ingersoll and Ross (1985), Vasicek (1977) and Longstaff (1989). With respect to two-factor models we analyse the following 2 models: Longstaff and Schwartz (1991) and Vasicek and Fong (1991). Lastly, we also consider the general multi-factor gaussian yield-curve model from Langetieg (1980). With respect to these models we derive the embedded volatility structure and relate them to the HJM modelling framework. Next, using the Hull og White (1990b)/(1993) model, it is shown that when introducing a time-dependent parameter in the drift-specification and in the volatility-specification that it is possible to match both the initial yield-curve and the initial volatility structure - this derivation is performed using the HJM framework. Lastly, multiple candidate trinomial models is being derived/analysed for the Hull and White model.

Author: Thomas S. Y. Ho
Publisher: Oxford University Press
ISBN: 9780199727704
Category : Business & Economics
Languages : en
Pages : 770

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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

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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: Frank J. Fabozzi
Publisher: John Wiley & Sons
ISBN: 047144698X
Category : Business & Economics
Languages : en
Pages : 530

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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: Cheng-Few Lee
Publisher: Springer Nature
ISBN: 3030912310
Category : Business & Economics
Languages : en
Pages : 2746

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Book Description
The Encyclopedia of Finance comprehensively covers the broad spectrum of terms and topics relating finance from asset pricing models to option pricing models to risk management and beyond. This third edition is comprised of over 1,300 individual definitions, chapters, appendices and is the most comprehensive and up-to-date resource in the field, integrating the most current terminology, research, theory, and practical applications. It includes 200 new terms and essays; 25 new chapters and four new appendices. Showcasing contributions from an international array of experts, the revised edition of this major reference work is unparalleled in the breadth and depth of its coverage.

Author: Frank J. Fabozzi, CFA
Publisher: John Wiley & Sons
ISBN: 9780471220947
Category : Business & Economics
Languages : en
Pages : 536

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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: Charnchai Leuwattanachotinan
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Book Description
In this thesis we use Markov chain Monte Carlo (MCMC) simulation to calibrate a two-factor arbitrage-free model for the term structure of interest rates which is proposed by Cairns (2004a) based on the positive-interest framework (Flesaker and Hughston, 1996). The model is a time-homogeneous model driven by latent state variables which follow a two-dimensional Ornstein-Uhlenbeck process. A number of MCMC algorithms are developed and employed for estimating both model parameters and latent variables where simulated data are used in the first place in order to validate the algorithms and ensure that they can result in reasonable and reliable estimates before using UK market data. Once the posterior estimates are obtained, we next investigate goodness of fit of the model and eventually assess the impact of parameter uncertainty on the forecasting of yield curves in which the achieved MCMC output can be used directly. Additionally, the developed algorithm is also applied for estimating the two-factor Vasicek term structure model for comparison. We conclude that our algorithms work reasonably well for estimating the Cairns term structure model. The model is then fitted to UK Strips data, and it found to produce reasonable fits for medium- and long-term yields, but we also conclude that some improvement may be required for the short-end of the yield curves.