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A Term Structure Model for Dividends and Interest Rates

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  • Damir Filipovi'c
  • Sander Willems

Abstract

Over the last decade, dividends have become a standalone asset class instead of a mere side product of an equity investment. We introduce a framework based on polynomial jump-diffusions to jointly price the term structures of dividends and interest rates. Prices for dividend futures, bonds, and the dividend paying stock are given in closed form. We present an efficient moment based approximation method for option pricing. In a calibration exercise we show that a parsimonious model specification has a good fit with Euribor interest rate swaps and swaptions, Euro Stoxx 50 index dividend futures and dividend options, and Euro Stoxx 50 index options.

Suggested Citation

  • Damir Filipovi'c & Sander Willems, 2018. "A Term Structure Model for Dividends and Interest Rates," Papers 1803.02249, arXiv.org, revised May 2020.
  • Handle: RePEc:arx:papers:1803.02249
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    References listed on IDEAS

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    Cited by:

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    3. Kirkby, J. Lars, 2023. "Hybrid equity swap, cap, and floor pricing under stochastic interest by Markov chain approximation," European Journal of Operational Research, Elsevier, vol. 305(2), pages 961-978.
    4. Fred Espen Benth, 2021. "Pricing of Commodity and Energy Derivatives for Polynomial Processes," Mathematics, MDPI, vol. 9(2), pages 1-30, January.
    5. Ed-Dafali, Slimane & Patel, Ritesh & Iqbal, Najaf, 2023. "A bibliometric review of dividend policy literature," Research in International Business and Finance, Elsevier, vol. 65(C).
    6. Qiming Zhang & Linda Yin-nor Tjia & Biyue Wang & Aksel Ersoy, 2021. "Sustainable Construction and Financing—Asset-Backed Securitization of Expressway’s Usufruct with Redeemable Rights," Sustainability, MDPI, vol. 13(16), pages 1-17, August.

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