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These days it's become convention (reinforced by the media's treatment of wealth) to assess our net worth by tallying up the market value of our financial assets, even though it's more natural and useful to think of our wealth as a stream of dollars over time given the nature of our income and...
Persistent link: https://www.econbiz.de/10012834170
This paper investigates how the market implicitly prices very long-dated cash-flows. We do this empirically, using daily market data on the 3½% War Loan, a UK infinite maturity coupon bond. We price the War Loan as an American option with 100 years of maturity. To this end, we perform daily...
Persistent link: https://www.econbiz.de/10012955977
Quanto CDS spreads are differences in CDS premiums of the same reference entity but in different currency denominations. Such spreads can arise in arbitrage-free models and depend on the risk of a jump in the exchange rate upon default of the underlying and the covariance between the exchange...
Persistent link: https://www.econbiz.de/10012909325
Recent findings on the term structure of equity and bond yields pose serious challenges to existing equilibrium asset pricing models. This paper presents a new equilibrium model to explain the joint historical dynamics of equity and bond yields (and their yield spreads). Equity/bond yields...
Persistent link: https://www.econbiz.de/10013234720
Some key features in the historical dynamics of U.S. Treasury bond yields – a trend in long-term yields, business cycle movements in short-term yields, and a level shift in yield spreads – pose serious challenges to existing equilibrium asset pricing models. This paper presents a new...
Persistent link: https://www.econbiz.de/10013244575
This paper presents an equilibrium bond-pricing model that jointly explains the upward-sloping nominal and real yield curves and the violation of the expectations hypothesis. Instead of relying on the inflation risk premium, the ambiguity-averse agent faces different amounts of Knightian...
Persistent link: https://www.econbiz.de/10013244576
Pricing bonds is generally one of the earliest applications of time value of money in a finance curriculum. A bond price incorporates the use of an annuity and an individual discounted cash flow while also being a “fundamental” financial security. This paper works through the pedagogy of...
Persistent link: https://www.econbiz.de/10013104140
SABR stochastic volatility model is appealing for modeling smile and skew of option prices. Hagan, who first proposed this model, derived a closed form approximation for european options and showed that it provides consistent and stable hedges. Here I prove a new exact closed formula for the...
Persistent link: https://www.econbiz.de/10013155518
The model derives risky corporate bond prices (or equivalently credit spreads) subject to credit default and migration risk, based on an extended version of the Jarrow, Lando and Turnbull model, under a risk-neutral framework, as a result of the simulation of a continuous time, time-homogeneous...
Persistent link: https://www.econbiz.de/10013067094
Fixed income investors favor higher yields with lower risk. Our objective in this paper is to outline an active fixed income strategy that maximizes yield and is protected against major risk factors affecting fixed income securities. In particular, we look at interest rate risk, credit risk,...
Persistent link: https://www.econbiz.de/10012893781