The Performance Of Multi Factor Term Structure Models For Pricing And Hedging Caps And Swaptions

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The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions

Author : Joost Driessen
Publisher :
ISBN 13 :
Total Pages : 52 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions by : Joost Driessen

Download or read book The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions written by Joost Driessen and published by . This book was released on 2002 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we empirically compare a wide range of different term structure models when it comes to the pricing and, in particular, hedging of caps and swaptions. We analyze the influence of the number of factors on the hedging and pricing results, and investigate which type of data quot;interest rate data or derivative price dataquot; should be used to estimate the model parameters to obtain the best hedging and pricing results. We use data on interest rates, and cap and swaption prices from 1995 to 1999. The empirical results on the hedging of caps and swaptions show that, if the number of hedge instruments is equal to the number of factors, the multi-factor models outperform one-factor models in hedging caps and swaptions. However, if one uses a large set of hedge instruments, one-factor models perform as well as multi-factor models. In terms of pricing, we find that models with two or three factors imply better out-of-sample predictions of cap and swaption prices than one-factor models. Also, estimation on the basis of current derivative prices leads to more accurate out-of-sample prediction of cap and swaption prices than estimation on the basis of interest rate data.

The Performance of Multi-factor Term Structure Models for Pricing and Hedging Caps and Swaptions

Author : Joost Johannes Arnold Gerardus Driessen
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (535 download)

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Book Synopsis The Performance of Multi-factor Term Structure Models for Pricing and Hedging Caps and Swaptions by : Joost Johannes Arnold Gerardus Driessen

Download or read book The Performance of Multi-factor Term Structure Models for Pricing and Hedging Caps and Swaptions written by Joost Johannes Arnold Gerardus Driessen and published by . This book was released on 2000 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

An Examination of the Static and Dynamic Performance of Interest Rate Option Pricing Models in the Dollar Cap-Floor Markets

Author : Anurag Gupta
Publisher :
ISBN 13 :
Total Pages : 46 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis An Examination of the Static and Dynamic Performance of Interest Rate Option Pricing Models in the Dollar Cap-Floor Markets by : Anurag Gupta

Download or read book An Examination of the Static and Dynamic Performance of Interest Rate Option Pricing Models in the Dollar Cap-Floor Markets written by Anurag Gupta and published by . This book was released on 2001 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: An Examination of the Static and Dynamic Performance of Interest Rate Option Pricing Models In the Dollar Cap-Floor Markets Anurag Gupta Marti G. Subrahmanyam Abstract This paper examines the static and dynamic accuracy of interest rate option pricing models in the U.S. dollar interest rate cap and floor markets. We evaluate alternative one-factor and two-factor term structure models of the spot and the forward interest rates on the basis of their out-of-sample predictive ability in terms of pricing and hedging performance. In addition, the models are evaluated based on the stability of their parameters, the presence of systematic biases, and their numerical complexity and computational efficiency. We conduct tests on daily data from March-December 1998, consisting of actual cap and floor prices across both strike rates and maturities. Results show that fitting the skew of the underlying interest rate distribution provides accurate pricing results within a one-factor framework. However, for hedging performance, introducing a second stochastic factor is more important than fitting the skew of the underlying distribution. Overall, the one-factor lognormal model for short term interest rates outperforms other competing models in pricing tests, while two-factor models perform significantly better than one-factor models in hedging tests. Modeling the second factor allows a better representation of the dynamic evolution of the term structure by incorporating expected twists in the yield curve. Thus, the interest rate dynamics embedded in two-factor models appears to be closer to the one driving the actual economic environment, leading to more accurate hedges. This constitutes evidence against claims in the literature that correctly specified and calibrated one-factor models could replace multi-factor models for consistent pricing and hedging of interest rate contingent claims.

Dynamic Term Structure Modeling

Author : Sanjay K. Nawalkha
Publisher : John Wiley & Sons
ISBN 13 : 0470140062
Total Pages : 722 pages
Book Rating : 4.4/5 (71 download)

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Book Synopsis Dynamic Term Structure Modeling by : Sanjay K. Nawalkha

Download or read book Dynamic Term Structure Modeling written by Sanjay K. Nawalkha and published by John Wiley & Sons. This book was released on 2007-05-23 with total page 722 pages. Available in PDF, EPUB and Kindle. Book excerpt: Praise for Dynamic Term Structure Modeling "This book offers the most comprehensive coverage of term-structure models I have seen so far, encompassing equilibrium and no-arbitrage models in a new framework, along with the major solution techniques using trees, PDE methods, Fourier methods, and approximations. It is an essential reference for academics and practitioners alike." --Sanjiv Ranjan Das Professor of Finance, Santa Clara University, California, coeditor, Journal of Derivatives "Bravo! This is an exhaustive analysis of the yield curve dynamics. It is clear, pedagogically impressive, well presented, and to the point." --Nassim Nicholas Taleb author, Dynamic Hedging and The Black Swan "Nawalkha, Beliaeva, and Soto have put together a comprehensive, up-to-date textbook on modern dynamic term structure modeling. It is both accessible and rigorous and should be of tremendous interest to anyone who wants to learn about state-of-the-art fixed income modeling. It provides many numerical examples that will be valuable to readers interested in the practical implementations of these models." --Pierre Collin-Dufresne Associate Professor of Finance, UC Berkeley "The book provides a comprehensive description of the continuous time interest rate models. It serves an important part of the trilogy, useful for financial engineers to grasp the theoretical underpinnings and the practical implementation." --Thomas S. Y. Ho, PHD President, Thomas Ho Company, Ltd, coauthor, The Oxford Guide to Financial Modeling

The Valuation of Caps, Floors and Swaptions in a Multi-Factor Spot-Rate Model

Author : Sandra Peterson
Publisher :
ISBN 13 :
Total Pages : 50 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis The Valuation of Caps, Floors and Swaptions in a Multi-Factor Spot-Rate Model by : Sandra Peterson

Download or read book The Valuation of Caps, Floors and Swaptions in a Multi-Factor Spot-Rate Model written by Sandra Peterson and published by . This book was released on 2001 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: We build a multi-factor, no-arbitrage model of the term structure of interest rates. The stochastic factors are the short-term interest rate and the premia of the futures rates over the short-term interest rate. In the three-factor version of the model, for example, the first factor is the three-month LIBOR, the second factor is the premium of the first futures LIBOR over spot LIBOR, and the third factor is the incremental premium of the second futures over the first. The model provides an extension of the lognormal interest rate model of Black and Karasinski (1991) to multiple factors, each of which can exhibit mean-reversion. The method is computationally efficient for several reasons. First, since our model is based on LIBOR futures prices, we can satisfy the no-arbitrage condition without resorting to iterative methods. Second, we modify and implement the binomial approximation methodology of Nelson and Ramaswamy (1990) and Ho, Stapleton and Subrahmanyam (1995) to compute a multi-period tree of rates with the no-arbitrage property.The method uses a recombining two or three-dimensional binomial lattice of interest rates that minimizes the number of states and term structures over time. In addition to these computational advantages, a key feature of the model is that it is consistent with the observed term structure of futures rates as well as the term structure of volatilities implied by the prices of interest rate caps and floors. We use the model to price European-style, Bermudan-style, and American-style swaptions.To implement the methodology, we first calibrate the model to the caplet implied-volatility curve on a given day, and then use the model to price European-style swaptions. We find that the two-factor model, where the LIBOR mean reverts rapidly to a slowly mean-reverting second factor overprices the swaptions relative to market quotations. However, introducing a third factor significantly reduces the overpricing. Finally, we re-calibrate the two-factor model simultaneously to caplet and swaption prices and use the model output to price Bermudan-style swaptions.

Modeling the Term Structure of Interest Rates

Author : Rajna Gibson
Publisher : Now Publishers Inc
ISBN 13 : 1601983727
Total Pages : 171 pages
Book Rating : 4.6/5 (19 download)

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Book Synopsis Modeling the Term Structure of Interest Rates by : Rajna Gibson

Download or read book Modeling the Term Structure of Interest Rates written by Rajna Gibson and published by Now Publishers Inc. This book was released on 2010 with total page 171 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

The Journal of Derivatives

Author :
Publisher :
ISBN 13 :
Total Pages : 788 pages
Book Rating : 4.3/5 (555 download)

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Book Synopsis The Journal of Derivatives by :

Download or read book The Journal of Derivatives written by and published by . This book was released on 2007 with total page 788 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Empirical Dynamic Asset Pricing

Author : Kenneth J. Singleton
Publisher : Princeton University Press
ISBN 13 : 1400829232
Total Pages : 497 pages
Book Rating : 4.4/5 (8 download)

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Book Synopsis Empirical Dynamic Asset Pricing by : Kenneth J. Singleton

Download or read book Empirical Dynamic Asset Pricing written by Kenneth J. Singleton and published by Princeton University Press. This book was released on 2009-12-13 with total page 497 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Efficient Pricing of Caps and Swaptions in a Multi-factor Gaussian Interest Rate Model

Author : Les Clewlow
Publisher :
ISBN 13 :
Total Pages : 18 pages
Book Rating : 4.:/5 (394 download)

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Book Synopsis Efficient Pricing of Caps and Swaptions in a Multi-factor Gaussian Interest Rate Model by : Les Clewlow

Download or read book Efficient Pricing of Caps and Swaptions in a Multi-factor Gaussian Interest Rate Model written by Les Clewlow and published by . This book was released on 1997 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Handbook of Computational Finance

Author : Jin-Chuan Duan
Publisher : Springer Science & Business Media
ISBN 13 : 3642172547
Total Pages : 791 pages
Book Rating : 4.6/5 (421 download)

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Book Synopsis Handbook of Computational Finance by : Jin-Chuan Duan

Download or read book Handbook of Computational Finance written by Jin-Chuan Duan and published by Springer Science & Business Media. This book was released on 2011-10-25 with total page 791 pages. Available in PDF, EPUB and Kindle. Book excerpt: Any financial asset that is openly traded has a market price. Except for extreme market conditions, market price may be more or less than a “fair” value. Fair value is likely to be some complicated function of the current intrinsic value of tangible or intangible assets underlying the claim and our assessment of the characteristics of the underlying assets with respect to the expected rate of growth, future dividends, volatility, and other relevant market factors. Some of these factors that affect the price can be measured at the time of a transaction with reasonably high accuracy. Most factors, however, relate to expectations about the future and to subjective issues, such as current management, corporate policies and market environment, that could affect the future financial performance of the underlying assets. Models are thus needed to describe the stochastic factors and environment, and their implementations inevitably require computational finance tools.

The Valuation of American-style Swaptions in a Two-factor Spot-futures Model

Author : Sandra Peterson
Publisher :
ISBN 13 :
Total Pages : 53 pages
Book Rating : 4.:/5 (247 download)

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Book Synopsis The Valuation of American-style Swaptions in a Two-factor Spot-futures Model by : Sandra Peterson

Download or read book The Valuation of American-style Swaptions in a Two-factor Spot-futures Model written by Sandra Peterson and published by . This book was released on 2000 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Interest Rates and Coupon Bonds in Quantum Finance

Author : Belal E. Baaquie
Publisher : Cambridge University Press
ISBN 13 : 1139483552
Total Pages : 509 pages
Book Rating : 4.1/5 (394 download)

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Book Synopsis Interest Rates and Coupon Bonds in Quantum Finance by : Belal E. Baaquie

Download or read book Interest Rates and Coupon Bonds in Quantum Finance written by Belal E. Baaquie and published by Cambridge University Press. This book was released on 2009-09-17 with total page 509 pages. Available in PDF, EPUB and Kindle. Book excerpt: The economic crisis of 2008 has shown that the capital markets need new theoretical and mathematical concepts to describe and price financial instruments. Focusing on interest rates and coupon bonds, this book does not employ stochastic calculus – the bedrock of the present day mathematical finance – for any of the derivations. Instead, it analyzes interest rates and coupon bonds using quantum finance. The Heath-Jarrow-Morton and the Libor Market Model are generalized by realizing the forward and Libor interest rates as an imperfectly correlated quantum field. Theoretical models have been calibrated and tested using bond and interest rates market data. Building on the principles formulated in the author's previous book (Quantum Finance, Cambridge University Press, 2004) this ground-breaking book brings together a diverse collection of theoretical and mathematical interest rate models. It will interest physicists and mathematicians researching in finance, and professionals working in the finance industry.

Pricing and Hedging Interest Rate Swaps Using Multi-factor Models

Author : Lynda McCarthy
Publisher :
ISBN 13 :
Total Pages : 522 pages
Book Rating : 4.:/5 (223 download)

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Book Synopsis Pricing and Hedging Interest Rate Swaps Using Multi-factor Models by : Lynda McCarthy

Download or read book Pricing and Hedging Interest Rate Swaps Using Multi-factor Models written by Lynda McCarthy and published by . This book was released on 2001 with total page 522 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Stochastic Duration and Fast Coupon Bond Option Pricing in Multi-factormodels

Author : Claus Munk
Publisher :
ISBN 13 :
Total Pages : 24 pages
Book Rating : 4.:/5 (46 download)

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Book Synopsis Stochastic Duration and Fast Coupon Bond Option Pricing in Multi-factormodels by : Claus Munk

Download or read book Stochastic Duration and Fast Coupon Bond Option Pricing in Multi-factormodels written by Claus Munk and published by . This book was released on 1998 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt:

ASTIN Bulletin

Author :
Publisher :
ISBN 13 :
Total Pages : 490 pages
Book Rating : 4.3/5 (91 download)

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Book Synopsis ASTIN Bulletin by :

Download or read book ASTIN Bulletin written by and published by . This book was released on 2003 with total page 490 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Term-Structure Models

Author : Damir Filipovic
Publisher : Springer Science & Business Media
ISBN 13 : 3540680152
Total Pages : 259 pages
Book Rating : 4.5/5 (46 download)

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Book Synopsis Term-Structure Models by : Damir Filipovic

Download or read book Term-Structure Models written by Damir Filipovic and published by Springer Science & Business Media. This book was released on 2009-07-28 with total page 259 pages. Available in PDF, EPUB and Kindle. Book excerpt: Changing interest rates constitute one of the major risk sources for banks, insurance companies, and other financial institutions. Modeling the term-structure movements of interest rates is a challenging task. This volume gives an introduction to the mathematics of term-structure models in continuous time. It includes practical aspects for fixed-income markets such as day-count conventions, duration of coupon-paying bonds and yield curve construction; arbitrage theory; short-rate models; the Heath-Jarrow-Morton methodology; consistent term-structure parametrizations; affine diffusion processes and option pricing with Fourier transform; LIBOR market models; and credit risk. The focus is on a mathematically straightforward but rigorous development of the theory. Students, researchers and practitioners will find this volume very useful. Each chapter ends with a set of exercises, that provides source for homework and exam questions. Readers are expected to be familiar with elementary Itô calculus, basic probability theory, and real and complex analysis.

Method for Swaption Pricing Under A Ffine Term Structure Models and Measure of Errors

Author : Chao Zheng
Publisher :
ISBN 13 :
Total Pages : 15 pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Method for Swaption Pricing Under A Ffine Term Structure Models and Measure of Errors by : Chao Zheng

Download or read book Method for Swaption Pricing Under A Ffine Term Structure Models and Measure of Errors written by Chao Zheng and published by . This book was released on 2014 with total page 15 pages. Available in PDF, EPUB and Kindle. Book excerpt: Swaptions are commonly traded to hedge the risk of the fluctuation of the interest rate. In the literature, several approximation methods have been proposed to price swaptions under affine term structure framework. However, none of them were able to provide a measure of pricing errors. In this paper, we develop the method of Collin-Dufresne and Goldstein, based on Edgeworth expansion, by providing an accurate measure of pricing errors, and we analyze it from two perspectives. Our numerical result demonstrates that it is accurate for swaptions whose underlying interest rate follows the Three-factor Gaussian model.