The short-term rate of interest is fundamental to much of theoretical and empirical finance. Yet no consensus has emerged on the dynamics of its volatility. We show that models which parameterize volatility only as a function of interest rate levels tend to over-emphasize the sensitivity of...

We use a no-arbitrage, cost-of-carry asset pricing model to show that the existence of cointegration between spot and forward (futures) prices depends on the time-series properties of the cost-of-carry. We argue that the conditions for cointegration are more likely to hold in currency markets...

Let "X" denote a positive Markov stochastic integral, and let "S"("t", μ) = exp(μ"t")"X"("t") represent the price of a security at time "t" with infinitesimal rate of return μ. Contingent claim (option) pricing formulas typically do not depend on μ. We show that if a contingent claim is not...

The short-term rate of interest is fundamental to much of theoretical and empirical finance, yet no consensus has emerged on the dynamics of its volatility. We show that models which parameterize volatility only as a function of interest rate levels tend to over emphasize the sensitivity of...

We use a no-arbitrage, cost-of-carry asset pricing model to show that the existence of cointegration between spot and forward (futures) prices depends on the time-series properties of the cost-of-carry. We argue that the conditions for cointegration are more likely to hold in currency markets...