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Design and Estimation of Quadratic Term Structure Models

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Author Info

  • Markus Leippold

    (University of Zurich)

  • Liuren Wu

    (Fordham University)

Abstract

We consider the design and estimation of quadratic term structure models. We start with a list of stylized facts on interest rates and interest rate derivatives, classified into three layers: (1) general statistical properties, (2) forecasting relations, and (3) conditional dynamics. We then investigate the implications of each layer of property on model design and strive to establish a mapping between evidence and model structures. We calibrate a two­factor model that approximates these three layers of properties well, and illustrate how the model can be applied to pricing interest rate derivatives.

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File URL: http://128.118.178.162/eps/fin/papers/0207/0207014.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0207014.

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Length: 49 pages
Date of creation: 30 Aug 2002
Date of revision:
Handle: RePEc:wpa:wuwpfi:0207014

Note: Type of Document - pdf; prepared on MikTex; to print on postscript; pages: 49 ; figures: included. produced via dvipdfm
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Web page: http://128.118.178.162

Related research

Keywords: quadratic model; term structure; positive interest rates; humps; expectation hy­pothesis; GMM; caps and floors.;

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References

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Citations

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Cited by:
  1. Don H. Kim, 2008. "Zero bound, option-implied PDFs, and term structure models," Finance and Economics Discussion Series 2008-31, Board of Governors of the Federal Reserve System (U.S.).
  2. Li Chen & H. Vincent Poor, 2003. "Credit Risk Modeling and the Term Structure of Credit Spreads," Finance 0312009, EconWPA.
  3. Marco Realdon, 2007. "Extended-Gaussian Term Structure Models and Credit Risk Applications," Discussion Papers 07/27, Department of Economics, University of York.
  4. Konstantijn Maes, 2004. "Modeling the Term Structure of Interest Rates: Where Do We Stand?," Working Paper Research 42, National Bank of Belgium.
  5. Kentaro Kikuchi, 2012. "Design and Estimation of a Quadratic Term Structure Model with a Mixture of Normal Distributions," IMES Discussion Paper Series 12-E-08, Institute for Monetary and Economic Studies, Bank of Japan.
  6. Andrew Ang & Jean Boivin & Sen Dong & Rudy Loo-Kung, 2011. "Monetary Policy Shifts and the Term Structure," Review of Economic Studies, Oxford University Press, vol. 78(2), pages 429-457.
  7. Markus Leippold & Liuren Wu, 2002. "Asset Pricing Under The Quadratic Class," Finance 0207015, EconWPA.
  8. Marco Realdon, 2006. "Quadratic Term Structure Models in Discrete Time," Discussion Papers 06/01, Department of Economics, University of York.
  9. Peng Cheng & Olivier Scaillet, 2002. "Linear-Quadratic Jump-Diffusion Modeling with Application to Stochastic Volatility," FAME Research Paper Series rp67, International Center for Financial Asset Management and Engineering.
  10. Enlin Pan & Liuren Wu, 2004. "Taking Positive Interest Rates Seriously," Finance 0409013, EconWPA.
  11. Feng Zhao & Robert Jarrow & Haitao Li, 2004. "Interest Rate Caps Smile Too! But Can the LIBOR Market Models Capture It?," Econometric Society 2004 North American Winter Meetings 431, Econometric Society.
  12. Satoshi Yamashita & Toshinao Yoshiba, 2011. "Analytical Solution for the Loss Distribution of a Collateralized Loan under a Quadratic Gaussian Default Intensity Process," IMES Discussion Paper Series 11-E-20, Institute for Monetary and Economic Studies, Bank of Japan.
  13. Don H Kim, 2007. "Spanned stochastic volatility in bond markets: a reexamination of the relative pricing between bonds and bond options," BIS Working Papers 239, Bank for International Settlements.
  14. Marco Realdon, 2006. "Equity Valuation Under Stochastic Interest Rates," Discussion Papers 06/12, Department of Economics, University of York.
  15. Samson Assefa, 2007. "Calibration and Pricing in a Multi-Factor Quadratic Gaussian Model," Research Paper Series 197, Quantitative Finance Research Centre, University of Technology, Sydney.
  16. Dai, Qiang & Singleton, Kenneth J., 2003. "Fixed-income pricing," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 20, pages 1207-1246 Elsevier.
  17. 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.
  18. Qiang Dai & Kenneth Singleton, 2003. "Term Structure Dynamics in Theory and Reality," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 631-678, July.
  19. Marco Realdon, 2007. "A Two Factor Black-Karasinski Credit Default Swap Pricing Model (forthcoming in the Icfai Journal of Derivatives Markets, Vol IV, No 4, October 2007; all copyrights rest with the Icfai University Pres," Discussion Papers 07/25, Department of Economics, University of York.
  20. Li Chen & H. Vincent Poor, 2003. "Markovian Quadratic Term Structure Models For Risk-free And Defaultable Rates," Finance 0303008, EconWPA.

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