The illiquidity of long-maturity options has made it difficult to study the term structures of option spanning portfolios. This paper proposes a new estimation and inference framework for these option-implied term structures that addresses long-maturity illiquidity. By building a sieve estimator...

This paper tests the expectations hypothesis of the term structure of implied volatility for several national stock market indexes. The tests indicate that the slope of at-the-money implied volatility over different maturities has predictive ability for future short-dated implied volatility,...

This paper presents a method for calibrating a multicurrency lognormal LIBOR Market Model to market data of at-the-money caps, swaptions and FX options. By exploiting the fact that multivariate normal distributions are invariant under orthonormal transformations, the calibration problem is...

This paper develops a new macro-financial continuous-time model for the term structure of interest rates assuming that the instantaneous interest rate converges to a certain long-term mean level that depends on the business cycle and that the interest rate volatility depends on the interest rate...

This work discusses the calibration of instantaneous Libor correlations in the Libor market model. We extend existing calibration strategies by incorporation of spread option implied correlation information. The correlation structure implied by CMS spread options observed in the present-day's...

Abstract: In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the model works...

The Libor Market Model describes the evolution of a discrete subset of all interest rates quoted in the market. Generation of the complete yield curve from a simulated set of rates (the so-called "Libor rate interpolation") is one of the basic challenges which are faced by a practical user of...

The Libor Market Model (LMM) describes the evolution of a yield curve through equations for a discrete set of forward rates. In the original version, the rate dynamic was log-normal. The rate dynamic has been extended. The main result presented here is a generic approximation that provides an...

We propose a simple computational method for constructing an arbitrage-free CDO pricing model which matches a pre-specified set of CDO tranche spreads. The key ingredient of the method is a formula for computing the local default intensity function of a portfolio from its expected tranche...

This paper shows that Singleton and Umantsev (2002)'s method for swaption pricing in affine models can be simplified and extended to other models. Two alternative methods for approximating the option exercise boundary are introduced: one based on the multivariate Taylor series expansion, and the...