Home  About us  Contact
 

Term Structure Models (term + structure_models)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting100%

Kinds of Term Structure Models

  • quadratic term structure models
    		•

    Selected Abstracts

    THE EIGENFUNCTION EXPANSION METHOD IN MULTI-FACTOR QUADRATIC TERM STRUCTURE MODELS

    MATHEMATICAL FINANCE, Issue 4 2007
    Nina Boyarchenko
    We propose the eigenfunction expansion method for pricing options in quadratic term structure models. The eigenvalues, eigenfunctions, and adjoint functions are calculated using elements of the representation theory of Lie algebras not only in the self-adjoint case, but in non-self-adjoint case as well; the eigenfunctions and adjoint functions are expressed in terms of Hermite polynomials. We demonstrate that the method is efficient for pricing caps, floors, and swaptions, if time to maturity is 1 year or more. We also consider subordination of the same class of models, and show that in the framework of the eigenfunction expansion approach, the subordinated models are (almost) as simple as pure Gaussian models. We study the dependence of Black implied volatilities and option prices on the type of non-Gaussian innovations. [source]

    LIFTING QUADRATIC TERM STRUCTURE MODELS TO INFINITE DIMENSION

    MATHEMATICAL FINANCE, Issue 4 2006
    Jirô Akahori
    We introduce an infinite dimensional generalization of quadratic term structure models of interest rates, aiming that the lift will give us a deeper understanding of the classical models. We show that it preserves some of the favorable properties of the classical quadratic models. [source]

    QUADRATIC TERM STRUCTURE MODELS FOR RISK-FREE AND DEFAULTABLE RATES

    MATHEMATICAL FINANCE, Issue 4 2004
    Li Chen
    In this paper, quadratic term structure models (QTSMs) are analyzed and characterized in a general Markovian setting. The primary motivation for this work is to find a useful extension of the traditional QTSM, which is based on an Ornstein,Uhlenbeck (OU) state process, while maintaining the analytical tractability of the model. To accomplish this, the class of quadratic processes, consisting of those Markov state processes that yield QTSM, is introduced. The main result states that OU processes are the only conservative quadratic processes. In general, however, a quadratic potential can be added to allow QTSMs to model default risk. It is further shown that the exponent functions that are inherent in the definition of the quadratic property can be determined by a system of Riccati equations with a unique admissible parameter set. The implications of these results for modeling the term structure of risk-free and defaultable rates are discussed. [source]

    Specification Analysis of Affine Term Structure Models

    THE JOURNAL OF FINANCE, Issue 5 2000
    Qiang Dai
    This paper explores the structural differences and relative goodness-of-fits of affine term structure models (ATSMs). Within the family of ATSMs there is a trade-off between flexibility in modeling the conditional correlations and volatilities of the risk factors. This trade-off is formalized by our classification of N -factor affine family into N+ 1 non-nested subfamilies of models. Specializing to three-factor ATSMs, our analysis suggests, based on theoretical considerations and empirical evidence, that some subfamilies of ATSMs are better suited than others to explaining historical interest rate behavior. [source]

    An Examination of Affine Term Structure Models,

    ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, Issue 4 2009
    Suk-Joon Byun
    Abstract This paper examines the relative performance of models in the affine term structure family which includes both complete and essential affine models using Korean government bond yield data. Principal component analysis with Korean government bond yield data shows that the first three components of yields explain 97% of the total yield curve variation, and the components can be characterized as "level", "slope", and "curvature." We also estimate all three-factor affine models using a Kalman filter/quasi maximum likelihood (QML) approach. An exhaustive comparison shows that the three-factor essential affine model, A1 (3) E, in which only one factor affects the instantaneous volatility of short rates but all three factors affect the price of risk, appears to be the best model in Korea. This finding is consistent with results in Dai and Singleton (2002) and Duffee (2002) on US data and in Tang and Xia (2007) on Canadian, German, Japanese, UK and US data. [source]

    Dynamic Optimality of Yield Curve Strategies,

    INTERNATIONAL REVIEW OF FINANCE, Issue 1-2 2003
    Takao Kobayashi
    This paper formulates and analyzes a dynamic optimization problem of bond portfolios within Markovian Heath,Jarrow,Morton term structure models. In particular, we investigate optimal yield curve strategies analytically and numerically, and provide theoretical justification for a typical strategy which is recommended in practice for an expected change in the shape of the yield curve. In the numerical analysis, we utilize a new technique based on the asymptotic expansion approach in order to increase efficiency in computation. [source]

    Stochastic Volatility in a Macro-Finance Model of the U.S. Term Structure of Interest Rates 1961,2004

    JOURNAL OF MONEY, CREDIT AND BANKING, Issue 6 2008
    PETER D. SPENCER
    affine term structure model; macro finance; unit root; stochastic volatility This paper generalizes the standard homoscedastic macro-finance model by allowing for stochastic volatility, using the "square root" specification of the mainstream finance literature. Empirically, this specification dominates the standard model because it is consistent with the square root volatility found in macroeconomic time series. Thus it establishes an important connection between the stochastic volatility of the mainstream finance model and macro-economic volatility of the Okun,Friedman type. This research opens the way to a richer specification of both macro-economic and term structure models, incorporating the best features of both macro-finance and mainstream finance models. [source]

    THE EIGENFUNCTION EXPANSION METHOD IN MULTI-FACTOR QUADRATIC TERM STRUCTURE MODELS

    MATHEMATICAL FINANCE, Issue 4 2007
    Nina Boyarchenko
    We propose the eigenfunction expansion method for pricing options in quadratic term structure models. The eigenvalues, eigenfunctions, and adjoint functions are calculated using elements of the representation theory of Lie algebras not only in the self-adjoint case, but in non-self-adjoint case as well; the eigenfunctions and adjoint functions are expressed in terms of Hermite polynomials. We demonstrate that the method is efficient for pricing caps, floors, and swaptions, if time to maturity is 1 year or more. We also consider subordination of the same class of models, and show that in the framework of the eigenfunction expansion approach, the subordinated models are (almost) as simple as pure Gaussian models. We study the dependence of Black implied volatilities and option prices on the type of non-Gaussian innovations. [source]

    LIFTING QUADRATIC TERM STRUCTURE MODELS TO INFINITE DIMENSION

    MATHEMATICAL FINANCE, Issue 4 2006
    Jirô Akahori
    We introduce an infinite dimensional generalization of quadratic term structure models of interest rates, aiming that the lift will give us a deeper understanding of the classical models. We show that it preserves some of the favorable properties of the classical quadratic models. [source]

    QUADRATIC TERM STRUCTURE MODELS FOR RISK-FREE AND DEFAULTABLE RATES

    MATHEMATICAL FINANCE, Issue 4 2004
    Li Chen
    In this paper, quadratic term structure models (QTSMs) are analyzed and characterized in a general Markovian setting. The primary motivation for this work is to find a useful extension of the traditional QTSM, which is based on an Ornstein,Uhlenbeck (OU) state process, while maintaining the analytical tractability of the model. To accomplish this, the class of quadratic processes, consisting of those Markov state processes that yield QTSM, is introduced. The main result states that OU processes are the only conservative quadratic processes. In general, however, a quadratic potential can be added to allow QTSMs to model default risk. It is further shown that the exponent functions that are inherent in the definition of the quadratic property can be determined by a system of Riccati equations with a unique admissible parameter set. The implications of these results for modeling the term structure of risk-free and defaultable rates are discussed. [source]

    SEPARABLE TERM STRUCTURES AND THE MAXIMAL DEGREE PROBLEM

    MATHEMATICAL FINANCE, Issue 4 2002
    Damir Filipovi
    This paper discusses separablc term structure diffusion models in an arbitrage-free environment. Using general consistency results we exploit the interplay between the diffusion coefficients and the functions determining the forward curve. We introduce the particular class of polynomial term structure models. We formulate the appropriate conditions under which the diffusion for a quadratic term structure model is necessarily an Ornstein-Uhlenbeck type process. Finally, we explore the maximal degree problem and show that basically any consistent polynomial term structure model is of degree two or less. [source]

    Unspanned Stochastic Volatility: Evidence from Hedging Interest Rate Derivatives

    THE JOURNAL OF FINANCE, Issue 1 2006
    HAITAO LI
    ABSTRACT Most existing dynamic term structure models assume that interest rate derivatives are redundant securities and can be perfectly hedged using solely bonds. We find that the quadratic term structure models have serious difficulties in hedging caps and cap straddles, even though they capture bond yields well. Furthermore, at-the-money straddle hedging errors are highly correlated with cap-implied volatilities and can explain a large fraction of hedging errors of all caps and straddles across moneyness and maturities. Our results strongly suggest the existence of systematic unspanned factors related to stochastic volatility in interest rate derivatives markets. [source]

    Specification Analysis of Affine Term Structure Models

    THE JOURNAL OF FINANCE, Issue 5 2000
    Qiang Dai
    This paper explores the structural differences and relative goodness-of-fits of affine term structure models (ATSMs). Within the family of ATSMs there is a trade-off between flexibility in modeling the conditional correlations and volatilities of the risk factors. This trade-off is formalized by our classification of N -factor affine family into N+ 1 non-nested subfamilies of models. Specializing to three-factor ATSMs, our analysis suggests, based on theoretical considerations and empirical evidence, that some subfamilies of ATSMs are better suited than others to explaining historical interest rate behavior. [source]

    MACRO-FINANCE MODELS OF INTEREST RATES AND THE ECONOMY

    THE MANCHESTER SCHOOL, Issue 2010
    GLENN D. RUDEBUSCH
    During the past decade, much new research has combined elements of finance, monetary economics and macroeconomics in order to study the relationship between the term structure of interest rates and the economy. In this survey, I describe three different strands of such interdisciplinary macro-finance term structure research. The first adds macroeconomic variables and structure to a canonical arbitrage-free finance representation of the yield curve. The second examines bond pricing and bond risk premiums in a canonical macroeconomic dynamic stochastic general equilibrium model. The third develops a new class of arbitrage-free term structure models that are empirically tractable and well suited to macro-finance investigations. [source]