We investigate whether the same finite dimensional dynamic system spans both interest rates (the yield curve) and interest rate options (the implied volatility surface). We find that the options market exhibits factors independent of the underlying yield curve. While three common factors are...

This paper studies the behavior of the default-risk-free real term structure and term premia in two general equilibrium endowment economies with complete markets but without money. In the first economy there are no frictions as in Lucas (1978) and in the second risk-sharing is limited by the...

In this paper we empirically compare a wide range of different term structure models when it comes to the pricing and, in particular, hedging of caps and swaptions. We analyze the influence of the number of factors on the hedging and pricing results, and investigate which type of data...

This paper develops and estimates an equilibrium model which investigates the relationship between the term structure of interest rates, inflation and GDP growth. The model accounts for non-neutral effects of inflation, so that real and monetary variables are interrelated and jointly influence...

This research makes joint use of the prices of nominal and inflation indexed bonds to estimate and study inflation risk premium and inflation expectations.First, I use a robust non-parametric procedure on UK data from 1983 to 1999 to extract weekly nominal and inflation indexed zero prices. Then...

We derive general properties of two-factor models of the term structure of interest rates and, in particular, the process for futures prices and rates. Then, as a special case, we derive a no-arbitrage model of the term structure in which any two futures rates act as factors. In this model, the...

This paper develops a general equilibrium model for a representative agent, production economy with stochastic internal habit formation. The model describes a scale-independent economy, with a unique stochastic investment opportunity set. Local correlation between the stochastic interest rate...

The market model of interest rates specifies simple forward or LIBOR rates as lognormaly distributed, their stochastic dynamics has a linear volatility function. This model is extended to quadratic volatility which is the product of a quadratic polynomial and a level-independent covariance...

In this paper, I focus on expected inflation as the main determinant of the yield curve. I assume that inflation shifts between different regimes that are unobservable to investors, and I derive a new term-structure model. Theoretically, the model reproduces most of the stylized facts of the...