Yield Curve Decomposition with Stochastic Market Price of Risk PDF Download
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Author: Swati Mital
Publisher:
ISBN:
Category :
Languages : en
Pages : 37
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Book Description
Affine Term Structure model that unifies two views in yield curve modeling: Principal Components as state variables in Affine world of models providing indispensable econometric knowledge of market observed yields and Stochastic Market Price of Risk which decouples the hard deterministic relationship between risk premium and return predicting factors.
Author: Swati Mital
Publisher:
ISBN:
Category :
Languages : en
Pages : 37
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Book Description
Affine Term Structure model that unifies two views in yield curve modeling: Principal Components as state variables in Affine world of models providing indispensable econometric knowledge of market observed yields and Stochastic Market Price of Risk which decouples the hard deterministic relationship between risk premium and return predicting factors.
Author: Moorad Choudhry
Publisher: John Wiley & Sons
ISBN: 1119141052
Category : Business & Economics
Languages : en
Pages : 390
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Book Description
Understand and interpret the global debt capital markets Now in a completely updated and expanded edition, this is a technical guide to the yield curve, a key indicator of the global capital markets and the understanding and accurate prediction of which is critical to all market participants. Being able to accurately and timely predict the shape and direction of the curve permits practitioners to consistently outperform the market. Analysing and Interpreting the Yield Curve, 2nd Edition describes what the yield curve is, explains what it tells participants, outlines the significance of certain shapes that the curve assumes and, most importantly, demonstrates what factors drive it and how it is modelled and used. Covers the FTP curve, the multi-currency curve, CSA, OIS-Libor and 3-curve models Gets you up to speed on the secured curve Describes application of theoretical versus market curve relative value trading Explains the concept of the risk-free rate Accessible demonstration of curve interpolation best-practice using cubic spline, Nelson-Siegel and Svensson 94 models This advanced text is essential reading for traders, asset managers, bankers and financial analysts, as well as graduate students in banking and finance.
Author: Abraham Lioui
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
In an economy where interest rates and stock price changes follow fairly general stochastic processes, we analyse the portfolio problem of an expected utility investor. When the investment opportunity set is driven by an arbitrary number of state variables, the optimal portfolio strategy is known to contain a speculative element and Merton-Breeden hedging terms against the fluctuations of each and every state variable. While the first component is well identified and easy to work out, the implementation of the last ones is problematic as the investor must identify all the relevant state variables and estimate their distribution characteristics. Using a new decomposition of the optimal wealth, we show that the optimal strategy can be simplified to include, in addition to the speculative component, only two Merton-Breeden type hedging elements, however large is the number of state variables. The first one is associated with interest rate risk and the second one with the risk brought about by the co-movements of the spot interest rate and the market prices of risk. The implementation of the optimal strategy is thus much easier, as it involves estimating the characteristics of the yield curve and the market prices of risk only rather than those of numerous (a priori unknown) state variables. Moreover, the investor's horizon is shown explicitly to play a crucial role in the optimal strategy design, in sharp contrast with the traditional decomposition.
Author: Mr.Ralph Chami
Publisher: International Monetary Fund
ISBN: 1513531867
Category : Business & Economics
Languages : en
Pages : 26
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Book Description
Investors seek to hedge against interest rate risk by taking long or short positions on bonds of different maturities. We study changes in risk taking behavior in a low interest rate environment by estimating a market stochastic discount factor that is non-linear and therefore consistent with the empirical properties of cashflow valuations identified in the literature. We provide evidence that non-linearities arise from hedging strategies of investors exposed to interest rate risk. Capital losses are amplified when interest rates increase and risk averse investors have taken positions on instruments with longer maturity, expecting instead interest rates to revert back to their historical average.
Author: John H. Cochrane
Publisher:
ISBN:
Category :
Languages : en
Pages : 54
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Book Description
We construct an affine model that incorporates bond risk premia. By understanding risk premia, we are able to use a lot of information from well-measured risk-neutral dynamics to characterize real expectations. We use the model to decompose the yield curve into expected interest rate and risk premium components. We characterize the interesting term structure of risk premia -- a forward rate reflects expected excess returns many years into the future, and current slope and curvature factors forecast future expected returns even though they do not forecast current returns.
Author: Francis X. Diebold
Publisher: Princeton University Press
ISBN: 0691146802
Category : Business & Economics
Languages : en
Pages : 223
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Book Description
Understanding the dynamic evolution of the yield curve is critical to many financial tasks, including pricing financial assets and their derivatives, managing financial risk, allocating portfolios, structuring fiscal debt, conducting monetary policy, and valuing capital goods. Unfortunately, most yield curve models tend to be theoretically rigorous but empirically disappointing, or empirically successful but theoretically lacking. In this book, Francis Diebold and Glenn Rudebusch propose two extensions of the classic yield curve model of Nelson and Siegel that are both theoretically rigorous and empirically successful. The first extension is the dynamic Nelson-Siegel model (DNS), while the second takes this dynamic version and makes it arbitrage-free (AFNS). Diebold and Rudebusch show how these two models are just slightly different implementations of a single unified approach to dynamic yield curve modeling and forecasting. They emphasize both descriptive and efficient-markets aspects, they pay special attention to the links between the yield curve and macroeconomic fundamentals, and they show why DNS and AFNS are likely to remain of lasting appeal even as alternative arbitrage-free models are developed. Based on the Econometric and Tinbergen Institutes Lectures, Yield Curve Modeling and Forecasting contains essential tools with enhanced utility for academics, central banks, governments, and industry.
Author: Riccardo Rebonato
Publisher:
ISBN: 1107165857
Category : Business & Economics
Languages : en
Pages : 781
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Book Description
Rebonato provides an authoritative, clear, and up-to-date explanation of the cutting-edge innovations in affine modeling for government bonds, and provides readers with the precise tools to develop their own models. This book combines precise theory with up-to-date empirical evidence to build, with the minimum mathematical sophistication required for the task, a critical understanding of what drives the government bond market.
Author: Shu Wu
Publisher:
ISBN:
Category :
Languages : en
Pages : 41
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Book Description
This paper estimates the joint dynamics of consumption growth and the long end of the real yield curve using an arbitrage-free term structure model with flexible specifications of market prices of risk. The model allows us to extract from prices of long-lived real bonds a small but persistent long-run component of consumption growth as well as time-varying levels of growth volatility. Consistent with the predications of recent long-run risk models, we find strong evidence that both risks are priced. The long-run consumption risk in fact dominates the short-run and consumption volatility risks and drives most of the variations in bond risk premiums. The risk premium for consumption volatility is negative, suggesting that long-term real bonds provide an effective hedge against the volatility risk in consumption growth. The short-run consumption risk commands a small risk premium. Stochastic growth volatility alone, however, is not sufficient to account for the time variations in bond risk premiums.
Author: Mr.Mark P. Taylor
Publisher: International Monetary Fund
ISBN: 145193145X
Category : Business & Economics
Languages : en
Pages : 38
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Book Description
We test and estimate a variety of alternative models of the yield curve, using weekly, high-quality U.K. data. We extend the Campbell-Shiller technique to the overlapping data case and apply it to reject the pure expectations hypothesis under rational expectations. We also find that risk measures, in the form of conditional interest rate volatility, are unable to explain the term premium. A simple, market segmentation approach is, however, moderately successful in explaining the term premium.
Author: Ronald J. Ryan
Publisher: Routledge
ISBN: 9781884964749
Category : Business & Economics
Languages : en
Pages : 219
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Book Description
Yield-Curve Dynamics examines both the advanced theory and the practice of state-of-the-art techniques for modeling, trading and hedging. Topics include: single- and multi-factor models; applying yield-curve modeling to risk management; yield-curve volatility; options pricing models; and forecasting short-term interest rates. This is an important and useful book for anyone involved in risk management, trading, research, options and exotic derivatives, and currency markets.
