This file is part of IDEAS , which uses RePEc data
[ Papers |
Articles |
Software |
Books |
Chapters |
Authors |
Institutions |
JEL Classification |
NEP reports |
Search |
New papers by email |
Author registration |
Rankings |
Volunteers |
FAQ |
Blog |
Help! ]
The performance of multi-factor term structure models for pricing and hedging caps and swaptions Author info | Abstract | Publisher info | Download info | Related research | Statistics Driessen, J.
Klaassen, P.
Melenberg, B. (Tilburg University, Center for Economic Research)
Additional information is available for the following
registered author(s):
In this paper we empirically compare different term structure models when it comes to the pricing and hedging of caps and swaptions. We analyze the influence of the number of factors on the pricing and hedging results, and investigate which type of data -interest rate data or derivative price data- should be used to estimate the model parameters to obtain the best pricing and hedging results. We use data on interest rates, and cap and swaption prices from 1995 to 1999. We find that models with two or three factors imply better out-of-sample predictions of cap and swaption prices than one-factor models. Also, estimation on the basis of derivative prices leads to more accurate out-of-sample prediction of cap and swaption prices than estimation on the basis of interest rate data. The empirical results on the hedging of caps and swaptions show that, if the number of hedge instruments is equal to the number of factors, the multi-factor models outperform one-factor models in hedging caps and swaptions. However, if one uses a large set of hedge instruments, one-factor models perform as well as multi-factor models.
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page . Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number
93.
Download reference. The following formats are available: HTML
(with abstract ),
plain text
(with abstract ),
BibTeX ,
RIS (EndNote, RefMan, ProCite),
ReDIF
Length:
Date of creation: 2000Date of revision:
Handle: RePEc:dgr:kubcen:200093Contact details of provider: Web page: http://center.uvt.nl
For technical questions regarding this item, or to correct its listing, contact: (Corry Stuyts).
Keywords: derivatives ; Other versions of this item:
Find related papers by JEL classification: G12 - Financial Economics - - General Financial Markets - - - Asset Pricing G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.:
Newey, Whitney K & West, Kenneth D, 1987.
"A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix ,"
Econometrica ,
Econometric Society, vol. 55(3), pages 703-08, May.
[Downloadable!] (restricted)
Other versions: Chan, K C, et al, 1992.
" An Empirical Comparison of Alternative Models of the Short-Term Interest Rate ,"
Journal of Finance ,
American Finance Association, vol. 47(3), pages 1209-27, July.
[Downloadable!] (restricted)
Vasicek, Oldrich, 1977.
"An equilibrium characterization of the term structure ,"
Journal of Financial Economics ,
Elsevier, vol. 5(2), pages 177-188, November.
[Downloadable!] (restricted)
Hansen, Lars Peter, 1982.
"Large Sample Properties of Generalized Method of Moments Estimators ,"
Econometrica ,
Econometric Society, vol. 50(4), pages 1029-54, July.
[Downloadable!] (restricted)
Heath, David & Jarrow, Robert & Morton, Andrew, 1992.
"Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation ,"
Econometrica ,
Econometric Society, vol. 60(1), pages 77-105, January.
[Downloadable!] (restricted)
Juan M. Moraleda & Ton Vorst, 1996.
"The Valuation of Interest Rate Derivatives: Empirical Evidence from the Spanish Market ,"
Tinbergen Institute Discussion Papers
96-170/2, Tinbergen Institute.
[Downloadable!]
Yacine Ait-Sahalia & Andrew W. Lo, 1995.
"Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices ,"
NBER Working Papers
5351, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Yacine Aït-Sahalia & Andrew W. Lo, .
"Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices ,"
CRSP working papers
332, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
Yacine Aït-Sahalia & Andrew W. Lo, 1998.
"Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices ,"
Journal of Finance ,
American Finance Association, vol. 53(2), pages 499-547, 04.
[Downloadable!] (restricted) Chernov, Mikhail & Ghysels, Eric, 2000.
"A study towards a unified approach to the joint estimation of objective and risk neutral measures for the purpose of options valuation ,"
Journal of Financial Economics ,
Elsevier, vol. 56(3), pages 407-458, June.
[Downloadable!] (restricted)
Nowman, K B, 1997.
" Gaussian Estimation of Single-Factor Continuous Time Models of the Term Structure of Interest Rates ,"
Journal of Finance ,
American Finance Association, vol. 52(4), pages 1695-1706, September.
[Downloadable!] (restricted)
Babbs, Simon H. & Nowman, K. Ben, 1999.
"Kalman Filtering of Generalized Vasicek Term Structure Models ,"
Journal of Financial and Quantitative Analysis ,
Cambridge University Press, vol. 34(01), pages 115-130, March.
[Downloadable!]
Moraleda, Juan M. & Vorst, Ton C. F., 1997.
"Pricing American interest rate claims with humped volatility models ,"
Journal of Banking & Finance ,
Elsevier, vol. 21(8), pages 1131-1157, August.
[Downloadable!] (restricted)
Black, Fischer, 1976.
"The pricing of commodity contracts ,"
Journal of Financial Economics ,
Elsevier, vol. 3(1-2), pages 167-179.
[Downloadable!] (restricted)
Heath, David & Jarrow, Robert & Morton, Andrew, 1990.
"Bond Pricing and the Term Structure of Interest Rates: A Discrete Time Approximation ,"
Journal of Financial and Quantitative Analysis ,
Cambridge University Press, vol. 25(04), pages 419-440, December.
[Downloadable!]
Hull, John C & White, Alan D, 1987.
" The Pricing of Options on Assets with Stochastic Volatilities ,"
Journal of Finance ,
American Finance Association, vol. 42(2), pages 281-300, June.
[Downloadable!] (restricted)
Jamshidian, Farshid, 1989.
" An Exact Bond Option Formula ,"
Journal of Finance ,
American Finance Association, vol. 44(1), pages 205-09, March.
[Downloadable!] (restricted)
Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985.
"A Theory of the Term Structure of Interest Rates ,"
Econometrica ,
Econometric Society, vol. 53(2), pages 385-407, March.
[Downloadable!] (restricted)
Clifford A. Ball & Walter N. Torous, 1999.
"The Stochastic Volatility of Short-Term Interest Rates: Some International Evidence ,"
Journal of Finance ,
American Finance Association, vol. 54(6), pages 2339-2359, December.
[Downloadable!] (restricted)
Hull, John & White, Alan, 1990.
"Pricing Interest-Rate-Derivative Securities ,"
Review of Financial Studies ,
Oxford University Press for Society for Financial Studies, vol. 3(4), pages 573-92.
[Downloadable!] (restricted)
Amin, Kaushik I. & Morton, Andrew J., 1994.
"Implied volatility functions in arbitrage-free term structure models ,"
Journal of Financial Economics ,
Elsevier, vol. 35(2), pages 141-180, April.
[Downloadable!] (restricted)
Longstaff, Francis A & Schwartz, Eduardo S, 1992.
" Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model ,"
Journal of Finance ,
American Finance Association, vol. 47(4), pages 1259-82, September.
[Downloadable!] (restricted)
Ho, Thomas S Y & Lee, Sang-bin, 1986.
" Term Structure Movements and Pricing Interest Rate Contingent Claims ,"
Journal of Finance ,
American Finance Association, vol. 41(5), pages 1011-29, December.
[Downloadable!] (restricted)
Full
references Cited by : (explanations , Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.)
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.
[Downloadable!]
Other versions: 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.
[Downloadable!]
Antonio Mannolini & Carlo Mari & Roberto Renò, 2008.
"Pricing caps and floors with the extended CIR model ,"
International Journal of Finance & Economics ,
John Wiley & Sons, Ltd., vol. 13(4), pages 386-400.
[Downloadable!]
Rong Fan & Joseph G. Haubrich & Peter Ritchken & James B. Thomson, 2002.
"Getting the most out of a mandatory subordinated debt requirement ,"
Working Paper
0214, Federal Reserve Bank of Cleveland.
[Downloadable!]
Other versions:
Rong Fan & Joseph Haubrich & Peter Ritchken & James Thomson, 2003.
"Getting the Most Out of a Mandatory Subordinated Debt Requirement ,"
Journal of Financial Services Research ,
Springer, vol. 24(2), pages 149-179, October.
[Downloadable!] (restricted) Rong Fan & Joseph G. Haubrich & Peter Ritchken & James B. Thomson, 2003.
"Getting the most out of mandatory subordinated debt requirement ,"
Proceedings ,
Federal Reserve Bank of Chicago, issue May, pages 290-303.
Caio Ibsen R. Almeida & José Valentim M. Vicente, 2006.
"Term Structure Movements Implicit in Option Prices ,"
Working Papers Series
128, Central Bank of Brazil, Research Department.
[Downloadable!]
Mireille Bossy & Rajna Gibson & Francois-Serge Lhabitant & Nathalie Pistre & Denis Talay, 2006.
"Model misspecification analysis for bond options and Markovian hedging strategies ,"
Review of Derivatives Research ,
Springer, vol. 9(2), pages 109-135, September.
[Downloadable!] (restricted)
Blaskowitz, Oliver & Herwartz, Helmut & de Cadenas Santiago, Gonzalo, 2005.
"Modeling the FIBOR/EURIBOR Swap Term Structure : An Empirical Approach ,"
Economics Working Papers
2005,04, Christian-Albrechts-University of Kiel, Department of Economics.
[Downloadable!]
Other versions: Jury Falini, 2009.
"Pricing caps with HJM models: the benefits of humped volatility ,"
Department of Economics University of Siena
563, Department of Economics, University of Siena.
[Downloadable!]
Daniel R. Smith & Christophe Parignon, 2004.
"Modeling Yield-Factor Volatility ,"
Econometric Society 2004 Australasian Meetings
307, Econometric Society.
[Downloadable!]
Access and
download statistics Did you know? IDEAS also indexes books .
This page was last updated on 2009-11-25.
This information is provided to you by IDEAS at the Department of Economics , College of Liberal Arts and Sciences , University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics .