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Option-based risk management of a bond portfolio under regime switching interest rates

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Author Info

  • Fabio Antonelli

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  • Alessandro Ramponi

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  • Sergio Scarlatti

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    Abstract

    In the present paper, we assume an economy with regime switching short rates and show how the Value at Risk of a financial position on zero-coupon bonds, hedged by buying protective put options under budget constraints, can be minimized by selecting optimal (regime-dependent) strike prices. Copyright Springer-Verlag 2013

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    File URL: http://hdl.handle.net/10.1007/s10203-011-0123-1
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    Bibliographic Info

    Article provided by Springer in its journal Decisions in Economics and Finance.

    Volume (Year): 36 (2013)
    Issue (Month): 1 (May)
    Pages: 47-70

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    Handle: RePEc:spr:decfin:v:36:y:2013:i:1:p:47-70

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    Web page: http://link.springer.de/link/service/journals/10203/index.htm

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    Related research

    Keywords: Value at Risk; Bond portfolio; Regime switching models; Semi-affine term structure; T-forward measures; 91B28; 91G60;

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    References

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    1. Qiang Dai & Kenneth J. Singleton & Wei Yang, 2007. "Regime Shifts in a Dynamic Term Structure Model of U.S. Treasury Bond Yields," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1669-1706, 2007 12.
    2. Dong-Hyun Ahn & Jacob Boudoukh & Matthew Richardson & Robert F. Whitelaw, 1999. "Optimal Risk Management Using Options," Journal of Finance, American Finance Association, vol. 54(1), pages 359-375, 02.
    3. Robert Elliott & Rogemar Mamon, 2002. "An interest rate model with a Markovian mean reverting level," Quantitative Finance, Taylor & Francis Journals, vol. 2(6), pages 454-458.
    4. Ang, Andrew & Bekaert, Geert, 2002. "Regime Switches in Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 163-82, April.
    5. Qiang Dai & Kenneth Singleton, 2003. "Term Structure Dynamics in Theory and Reality," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 631-678, July.
    6. Tomas Björk & Yuri Kabanov & Wolfgang Runggaldier, 1997. "Bond Market Structure in the Presence of Marked Point Processes," Mathematical Finance, Wiley Blackwell, vol. 7(2), pages 211-239.
    7. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
    8. Annaert, Jan & Deelstra, Griselda & Heyman, Dries & Vanmaele, Michèle, 2007. "Risk management of a bond portfolio using options," Insurance: Mathematics and Economics, Elsevier, vol. 41(3), pages 299-316, November.
    9. Griselda Deelstra & Ahmed Ezzine & Dries Heyman & Michèle Vanmaele, 2007. "Managing value-at-risk for a bond using bond put options," Computational Economics, Society for Computational Economics, vol. 29(2), pages 139-149, March.
    10. Jamshidian, Farshid, 1989. " An Exact Bond Option Formula," Journal of Finance, American Finance Association, vol. 44(1), pages 205-09, March.
    11. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    12. J. Annaert & G. Deelstra & D. Heyman & M. Vanmaele, 2007. "Risk management of a bond portfolio using options," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/465, Ghent University, Faculty of Economics and Business Administration.
    13. Asbjørn T. Hansen & Rolf Poulsen, 2000. "A simple regime switching term structure model," Finance and Stochastics, Springer, vol. 4(4), pages 409-429.
    14. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
    15. Camilla LandÊn, 2000. "Bond pricing in a hidden Markov model of the short rate," Finance and Stochastics, Springer, vol. 4(4), pages 371-389.
    16. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
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