We propose a novel time-changed L évy LIBOR market model for the joint pricing of caps and swaptions. The time changes are split into three components. The first component allows us to match the volatility term structure, the second generates stochastic volatility, and the third one...

We decompose conditional volatilities of US Treasury yields into components due to short-rate expectations and term premia. To this end, we propose a novel no-arbitrage model which we estimate with extensive second-moment data. Short-rate expectations become more volatile than premia before...

The Nelson-Siegel and the Svensson models are widely used in practice for fitting the term structure of interest rates. However, due to their highly non-linear nature and the potential danger of multicollinearity, numerical difficulties in estimating these models hamper their implementation. In...

Starting from the discrete-time a ne term structure model by Dai, Le & Singleton (2006), this paper proposes a Radon-Nikodym derivative which implies that factors follow a mixture distribution under the physical measure. The model thus maintains attractive features of an affine relation between...

Popular yield curve models include affine term structure models. These models are usually based on a fixed set of parameters which is calibrated to the actual financial market conditions. Under changing market conditions also parametrization changes. We discuss how parameters need to be updated...

In this discussion paper we introduce time-varying parameters in the dynamic Nelson–Siegel yield curve model for the simultaneous analysis and forecasting of interest rates of different maturities. The Nelson–Siegel model has been recently reformulated as a dynamic factor model with vector...

We consider forward rate rate models of HJM type, as well as more general infinite dimensional SDEs, where the volatility/diffusion term is stochastic in the sense of being driven by a separate hidden Markov process. Within this framework we use the previously developed Hilbert space realization...

This paper reexamines the issue of unspanned stochastic volatility (USV) in bond markets and the puzzle of poor relative pricing between bonds and bond options. I make a distinction between the "weak USV" and the "strong USV" scenarios, and analyze the evidence for each of them. I argue that the...

I study the relationship between interest rates and interest-rate volatility, particularly the idea of unspanned stochastic volatility (USV): volatility risk that cannot be hedged with bonds or swaps. Simulated data is used to assess the ability of regression-based techniques, popular but...

The Libor Market Model (LMM) describes the evolution of a yield curve through equations for a discrete set of forward rates. In the original version, the rate dynamic was log-normal. The rate dynamic has been extended. The main result presented here is a generic approximation that provides an...