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A Term Structure Model for Dividends and Interest Rates

Author

Listed:
  • Damir Filipović

    (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)

  • Sander Willems

    (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)

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 futures options, and Euro Stoxx 50 index options.

Suggested Citation

  • Damir Filipović & Sander Willems, 2017. "A Term Structure Model for Dividends and Interest Rates," Swiss Finance Institute Research Paper Series 17-52, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1752
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3016310
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    Cited by:

    1. Peter Carr & Sander Willems, 2019. "A lognormal type stochastic volatility model with quadratic drift," Papers 1908.07417, arXiv.org.

    More about this item

    Keywords

    Dividend derivatives; interest rates; polynomial jump-diffusion; term structure; moment-based option pricing;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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