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An Empirical Comparison of Forward-Rate and Spot-Rate Models for Valuing Interest-Rate Options

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  • Wolfgang Bühler

    (University of Mannheim, Germany,)

  • Marliese Uhrig-Homburg

    (University of Mannheim, Germany,)

  • Ulrich Walter

    (Deutsche Genossenschaftsbank, Germany,)

  • Thomas Weber

    (Infinity Financial Technology, London)

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    Abstract

    Our main goal is to investigate the question of which interest-rate options valuation models are better suited to support the management of interest-rate risk. We use the German market to test seven spot-rate and forward-rate models with one and two factors for interest-rate warrants for the period from 1990 to 1993. We identify a one-factor forward-rate model and two spot-rate models with two factors that are not significantly outperformed by any of the other four models. Further rankings are possible if additional criteria are applied. Copyright The American Finance Association 1999.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 54 (1999)
    Issue (Month): 1 (02)
    Pages: 269-305

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    Handle: RePEc:bla:jfinan:v:54:y:1999:i:1:p:269-305

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    Cited by:
    1. R.C. Stapleton & Marti G. Subrahmanyam, 1999. "The Term Structure of Interest Rate-Futures Prices," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-045, New York University, Leonard N. Stern School of Business-.
    2. Kabir K. Dutta & David F. Babbel, 2002. "Extracting Probabilistic Information from the Prices of Interest Rate Options: Tests of Distributional Assumptions," Center for Financial Institutions Working Papers 02-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
    3. Svenstrup, Mikkel, 2003. "On the Suboptimality of Single-Factor Exercise Strategies for Bermudan Swaptions," Finance Working Papers 02-24, University of Aarhus, Aarhus School of Business, Department of Business Studies.

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