Are Interest Rate Derivatives Spanned by the Term Structure of Interest Rates?

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Are Interest Rate Derivatives Spanned by the Term Structure of Interest Rates?

Author Info

Massoud Heidari (Caspian Capital)
Liuren WU (Fordham University)

Additional information is available for the following registered author(s):

Liuren Wu

Abstract

We investigate whether the same finite dimensional dynamic system spans both interest rates (the yield curve) and interest rate options (the implied volatility surface). We find that the options market exhibits factors independent of the underlying yield curve. While three common factors are adequate to capture the systematic movement of the yield curve, we need three additional factors to capture the movement of the implied volatility surface.

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Paper provided by EconWPA in its series Finance with number 0207013.

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Length: 48 pages
Date of creation: 30 Aug 2002
Date of revision:
Handle: RePEc:wpa:wuwpfi:0207013

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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

References listed on IDEAS
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Other versions:
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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.)

Liuren Wu & Frank Xiaoling Zhang, 2005. "A no-arbitrage analysis of economic determinants of the credit spread term structure," Finance and Economics Discussion Series 2005-59, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
Enlin Pan & Liuren Wu, 2004. "Taking Positive Interest Rates Seriously," Finance 0409013, EconWPA. [Downloadable!]
Massoud Heidari & Liuren Wu, 2002. "Term Structure of Interest Rates, Yield Curve Residuals, and the Consistent Pricing of Interest Rates and Interest Rate Derivatives," Finance 0207010, EconWPA, revised 05 Sep 2002. [Downloadable!]

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