Author: Juan M. Moraleda
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Using daily caps and floors market prices throughout the years 1993 and 1994, we address the open question whether spot or forward interest-rate models of the term structure provide a better fit to market prices of options. In particular, we compare the Hull and White (1994), Pelsser (1996) and Black and Karasinski (1991) models with Gaussian, square root and proportional models as developed by Ritchken and Sankarasubramanian (1995). Interestingly, we find that all spot interest-rate models outperform their similar counterparts in the forward rate setting. Furthermore, we test a number of humped volatility models obtained as extensions of the above-mentioned models under both approaches, and due to Mercurio and Moraleda (1996a and 1996b) and Moraleda and Vorst (1996). The fit to market option prices is largely improved (around 30 percent) by all humped volatility models under the spot interest-rate setting. Things are different for forward interest-rate models since we find strictly decreasing volatility structures for all maturities. An exception are forward rate models with deterministic volatility functions, for which humped shapes in the volatility are typically found. The results in this paper are consistent with previous studies, although they partly disagree with results of Bliss and Ritchken (1996).
Author: Antoon Pelsser
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Using daily caps and floors market prices throughout the years 1993 and 1994, we address the open question whether spot or forward interest-rate models of the term structure provide a better fit to market prices of options. In particular, we compare the Hull and White (1994), Pelsser (1996) and Black and Karasinski (1991) models with Gaussian, square root and proportional models as developed by Ritchken and Sankarasubramanian (1995). Interestingly, we find that all spot interest-rate models outperform their similar counterparts in the forward rate setting. Furthermore, we test a number of humped volatility models obtained as extensions of the above-mentioned models under both approaches, and due to Mercurio and Moraleda (1996a and 1996b) and Moraleda and Vorst prices is largely improved (around 30 percent) by all humped volatility models under the spot interest-rate setting. Things are different for forward interest-rate models since we find strictly decreasing volatility structures for all maturities. An exception are forward rate models with deterministic volatility functions, for which humped shapes in the volatility are typically found. The results in this paper are consistent with previous studies, although they partly disagree with results of Bliss and Ritchken (1996).
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: Ken O. Kortanek
Publisher: John Wiley & Sons
ISBN:
Category : Business & Economics
Languages : en
Pages : 248
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Book Description
This book offers a new approach to interest rate and modeling term structure by using models based on optimization of dynamical systems, rather than the traditional stochastic differential equation models. The authors use dynamic models to estimate the term structure of interest rates and show the reader how to build their own numerical simulations. It includes software that will enable readers to simulate the various models covered in the book.
Author: Mr.Lars E. O. Svensson
Publisher: International Monetary Fund
ISBN: 1451853750
Category : Business & Economics
Languages : en
Pages : 76
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Book Description
The use of forward interest rates as a monetary policy indicator is demonstrated, using Sweden 1992-1994 as an example. The forward rates are interpreted as indicating market expectations of the time-path of future interest rates, future inflation rates, and future currency depreciation rates. They separate market expectations for the short-, medium-, and long-term more easily than the standard yield curve. Forward rates are estimated with an extended and more flexible version of Nelson and Siegel’s functional form.
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: Paul Glasserman
Publisher:
ISBN:
Category :
Languages : en
Pages : 37
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Book Description
This paper characterizes the arbitrage-free dynamics of interest rates, in the presence of both jumps and diffusion, when the term structure is modeled through simple forward rates (i.e., through discretely compounded forward rates evolving continuously in time) or forward swap rates. Whereas instantaneous continuously compounded rates form the basis of most interest rate models, simply compounded rates and their parameters are more directly observable in practice. We consider very general types of jump processes, allowing randomness in jump sizes and dependence between jump sizes, jump times, and interest rates. We make explicit how jump and diffusion risk premia enter into the dynamics of simple forward rates. We also formulate reasonably tractable subclasses of models and provide pricing formulas for some derivative securities, including interest rate caps and options on swaps. Through these formulas, we illustrate the effect of jumps on implied volatilities in interest rate derivatives.
Author: Robert Sterling Goldstein
Publisher:
ISBN:
Category :
Languages : en
Pages : 194
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Book Description
Author: Peter H. Ritchken
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Studies of the sensitivity of the prices of interest rate claims to alternative specifications of the volatility of spot and forward interest rates have drawn different conclusions. One possible explanation for this is that it is difficult to adjust the volatility structure without disturbing the initial set of bond prices. In this article we use a term structure-constrained model that lets us change the volatility structure for spot and forward rates without altering either their initial values or the set of initial bond prices. Consequently, any differences in prices of interest rate-sensitive claims can be attributed solely to alternative assumptions on the structure of spot and forward rate volatilities, rather than to variations in the initial conditions. We show that even when the initial conditions are common, option prices on interest rates and on bonds are sensitive to the specification of the volatility structure of spot rates. Further, we find that using a simple generalized Vasicek model to price claims can lead to significant mispricings if interest rate volatilities do indeed depend on their levels.
Author: Damiano Brigo
Publisher: Springer Science & Business Media
ISBN: 354034604X
Category : Mathematics
Languages : en
Pages : 1016
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Book Description
The 2nd edition of this successful book has several new features. The calibration discussion of the basic LIBOR market model has been enriched considerably, with an analysis of the impact of the swaptions interpolation technique and of the exogenous instantaneous correlation on the calibration outputs. A discussion of historical estimation of the instantaneous correlation matrix and of rank reduction has been added, and a LIBOR-model consistent swaption-volatility interpolation technique has been introduced. The old sections devoted to the smile issue in the LIBOR market model have been enlarged into a new chapter. New sections on local-volatility dynamics, and on stochastic volatility models have been added, with a thorough treatment of the recently developed uncertain-volatility approach. Examples of calibrations to real market data are now considered. The fast-growing interest for hybrid products has led to a new chapter. A special focus here is devoted to the pricing of inflation-linked derivatives. The three final new chapters of this second edition are devoted to credit. Since Credit Derivatives are increasingly fundamental, and since in the reduced-form modeling framework much of the technique involved is analogous to interest-rate modeling, Credit Derivatives -- mostly Credit Default Swaps (CDS), CDS Options and Constant Maturity CDS - are discussed, building on the basic short rate-models and market models introduced earlier for the default-free market. Counterparty risk in interest rate payoff valuation is also considered, motivated by the recent Basel II framework developments.
