Although traded as distinct products, caps and swaptions are linked by no-arbitrage relations through the correlation structure of interest rates. Using a string model framework, we solve for the correlation matrix implied by the swaptions market and examine the relative valuation of caps and...

This paper studies the valuation and optimal exercise of American-style swaptions in a multi-factor string model of the term structure, and compares the results with those implied by standard single-factor term structure models. We find that single-factor models significantly undervalue...

If stocks go up, investors may want to rebalance their portfolios. But investors cannot all rebalance. Expected returns may need to change so that the average investor is still happy to hold the market portfolio despite its changed composition. In this way, simple market clearing can give rise...

We solve a model with two i.i.d. Lucas trees. Although the corresponding one-tree model produces a constant price-dividend ratio and i.i.d. returns, the two-tree model produces interesting asset-pricing dynamics. Investors want to rebalance their portfolios after any change in value. Because the...