General Quadratic Term Structures of Bond, Futures and Forward Prices
AbstractFor finite dimensional factor models, the paper studies general quadratic term structures. These term structures include as special cases the affine term structures and the Gaussian quadratic term structures, previously studied in the literature. We show, however, that there are other, non-Gaussian, quadratic term structures and derive sufficient conditions for the existence of these general quadratic term structures for bond, futures and forward prices. As forward prices are martingales under the T-forward measure, their term structure equation depends on properties of bond prices' term structure. We exploit the connection with the bond prices term structure and show that even in quadratic short rate settings we can have affine term structures for forward prices. Finally, we show how the study of futures prices is naturally embedded in a study of forward prices and show that the difference between the two prices have to do with the correlation between bond prices and the price process of the underlying to the forward contract and this difference may be deterministic in some (non-trivial) stochastic interest rate settings.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 559.
Length: 57 pages
Date of creation: 30 Mar 2004
Date of revision:
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More information through EDIRC
term structure; bond price; futures price; forward price; affine term structure; quadratic term structure;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-04-04 (All new papers)
- NEP-CFN-2004-04-04 (Corporate Finance)
- NEP-FIN-2004-04-04 (Finance)
- NEP-FMK-2004-04-04 (Financial Markets)
- NEP-RMG-2004-04-04 (Risk Management)
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.:
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