Arbitrage Opportunities in Arbitrage-Free Models of Bond Pricing.
Mathematical models of bond pricing are used by both academics and Wall Street practitioners, with practitioners introducing time-dependent parameters to fit 'arbitrage-free' models to selected asset prices. The authors show, in a simple one-factor setting, that the ability of such models to reproduce a subset of security prices need not extend to state-contingent claims more generally. They argue that the additional parameters of arbitrage-free models should be complemented by close attention to fundamentals, which might include mean reversion, multiple factors, stochastic volatility, and/or nonnormal interest-rate distributions.
Year of publication: |
1998
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Authors: | Backus, David ; Foresi, Silverio ; Zin, Stanley |
Published in: |
Journal of Business & Economic Statistics. - American Statistical Association. - Vol. 16.1998, 1, p. 13-26
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Publisher: |
American Statistical Association |
Saved in:
Saved in favorites
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