Showing 1 - 10 of 54
With increasing appreciation of the fact that stock return variance is stochastic and variance risk is heavily priced, the industry has created a series of variance derivative products to span variance risk. The variance swap contract is the most actively traded of these products. It pays at...
Persistent link: https://www.econbiz.de/10005858375
The challenge of international term structure models is to simultaneously account for the properties of interest rate term structures and foreign exchange rates within an arbitrage-free framework. We extend the quadratic term structure models proposed in Leippold and Wu (2002) to multiple...
Persistent link: https://www.econbiz.de/10005858853
We present a dynamic term structure model in which interest rates of all maturities are bounded from below at zero. Positivity and continuity, combined with no arbitrage, result in only one functional form for the term structure with three sources of risk. One dynamic factor controls the level...
Persistent link: https://www.econbiz.de/10005413120
We propose a direct and robust method for quantifying the variance risk premium on financial assets. We theoretically and numerically show that the risk-neutral expected value of the return variance, also known as the variance swap rate, is well approximated by the value of a particular...
Persistent link: https://www.econbiz.de/10005413197
We consider the hedging of options when the price of the underlying asset is always exposed to the possibility of jumps of random size. Working in a single factor Markovian setting, we derive a new spanning relation between a given option and a continuum of shorter-term options written on the...
Persistent link: https://www.econbiz.de/10005413226
We consider the design and estimation of quadratic term structure models. We start with a list of stylized facts on interest rates and interest rate derivatives, classified into three layers: (1) general statistical properties, (2) forecasting relations, and (3) conditional dynamics. We then...
Persistent link: https://www.econbiz.de/10005413240
The U.S. agency mortgage backed securities (MBS) market is deep and highly liquid, yet modeling MBS is extremely challenging. This paper applies market participants' desired requirements for a good pricing model to MBS pricing models provided by six of the top MBS dealers. We find that five out...
Persistent link: https://www.econbiz.de/10005561622
This article analyzes the specifications of option pricing models based on time-changed Levy processes. We classify option pricing models based on (i) the structure of the jump component in the underlying return process, (ii) the source of stochastic volatility, and (iii) the specification of...
Persistent link: https://www.econbiz.de/10005699646
Prices of currency options commonly differ from the Black-Scholes formula along two dimensions: implied volatilities vary by strike price (volatility smiles) and maturity (implied volatility of at­the­money options increases, on average, with maturity). We account for both using Gram­Charlier...
Persistent link: https://www.econbiz.de/10005134642
Dynamic term structure models (DTSMs) price interest rate derivatives based on the model­ implied fair values of the yield curve, ignoring any pricing residuals on the yield curve that are either from model approximations or market imperfections. In contrast, option pricing in practice often...
Persistent link: https://www.econbiz.de/10005134665