Bond and option prices contain information on the future distribution of the state variables related to interest rates at multiple horizons based on the maturity/expiration of the assets. This study uses the information contained in Eurodollar futures and futures options prices to make...

We build a no-arbitrage model of the term structure of interest rates using two stochastic factors, the short-term interest rate and the premium of the futures rate over the short-term interest rate. The model provides an extension of the lognormal interest rate model of Black and Karasinski...

Knowledge of the term structure of interest rates is undeniably important. It enables the price of a stream of cash flows to be determined and is a key element for pricing certain types of derivative instruments including swaps and forward contracts. It is useful in the formation of economic...

This paper develops a dynamic general equilibrium asset pricing model to account for the discontinuous price movements commonly observed in the financial markets. We consider two possible sources: (1) jumps in the fundamental economy, as captured by the production technology, and (2) jumps in...

The effect of model and parameter misspecification on the effectiveness of Gaussian hedging strategies for derivative financial instruments is analyzed, showing that Gaussian hedges in the quot;naturalquot; hedging instruments are particularly robust. This is true for all models the imply...

The pricing kernel, or the state-price density, which relates future cash flows to today's price, is the fundamental building block of modern asset pricing theory. In abstract, the state-price density process can be regarded as a positive supermartingale, or, under some regularity conditions, a...

This paper considers the pricing of Bermuda-style swaptions in the Libor market model (Brace et al (1997), Jamshidian (1997), Miltersen et al (1997)) and its extensions (Andersen and Andreasen (1998)). Due to its large number of state variables, application of lattice methods to this model class...

Hedging a derivative security with non-risk-neutral number of shares leads to portfolio profit or loss. Unlike in the Black-Scholes world, the net present value of all future cash flows till maturity is no longer deterministic, and basis risk may be present at any time. The key object of our...

Methods of functional analysis are applied to describe collectively fluctuating default-free pure discount bonds subject to trading-related noise which generates arbitrage opportunities. Two key elements of the model are: (i) the naturally incorporated fixed bond price at maturity which is...

In this work, I generalize Merton's approach of pricing risky debt to the case where the interest rate is modeled by the CIR term structure. Closed form result for pricing the debt is given for the case where the firm value has non-zero correlation with the interest rate. This extends previous...