Bonds and Options in Exponentially Affine Bond Models
(2012) In Applied Mathematical Finance 19(6). p.513-534- Abstract
- In this article we apply the Flesaker–Hughston approach to invert the yield curve and to price various options by letting the randomness in the economy be driven by a process closely related to the short rate, called the abstract short rate. This process is a pure deterministic translation of the short rate itself, and we use the deterministic shift to calibrate the models to the initial yield curve. We show that we can solve for the shift needed in closed form by transforming the problem to a new probability measure. Furthermore, when the abstract short rate follows a Cox–Ingersoll–Ross (CIR) process we compute bond option and swaption prices in closed form. We also propose a short-rate specification under the risk-neutral measure that... (More)
- In this article we apply the Flesaker–Hughston approach to invert the yield curve and to price various options by letting the randomness in the economy be driven by a process closely related to the short rate, called the abstract short rate. This process is a pure deterministic translation of the short rate itself, and we use the deterministic shift to calibrate the models to the initial yield curve. We show that we can solve for the shift needed in closed form by transforming the problem to a new probability measure. Furthermore, when the abstract short rate follows a Cox–Ingersoll–Ross (CIR) process we compute bond option and swaption prices in closed form. We also propose a short-rate specification under the risk-neutral measure that allows the yield curve to be inverted and is consistent with the CIR dynamics for the abstract short rate, thus giving rise to closed form bond option and swaption prices. (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/7ebcf490-5b31-47d9-a958-3c148f61d65a
- author
- Bermin, Hans-Peter LU
- publishing date
- 2012
- type
- Contribution to journal
- publication status
- published
- subject
- keywords
- interest rates, yield curve, term structure, bonds, bond options, swaptions, square-root process, exponentially affine measure
- in
- Applied Mathematical Finance
- volume
- 19
- issue
- 6
- pages
- 22 pages
- publisher
- Routledge
- external identifiers
-
- scopus:84867280118
- ISSN
- 1350-486X
- DOI
- 10.1080/1350486X.2011.646505
- language
- English
- LU publication?
- no
- id
- 7ebcf490-5b31-47d9-a958-3c148f61d65a
- date added to LUP
- 2017-01-21 16:46:36
- date last changed
- 2022-01-30 17:16:34
@article{7ebcf490-5b31-47d9-a958-3c148f61d65a,
abstract = {{In this article we apply the Flesaker–Hughston approach to invert the yield curve and to price various options by letting the randomness in the economy be driven by a process closely related to the short rate, called the abstract short rate. This process is a pure deterministic translation of the short rate itself, and we use the deterministic shift to calibrate the models to the initial yield curve. We show that we can solve for the shift needed in closed form by transforming the problem to a new probability measure. Furthermore, when the abstract short rate follows a Cox–Ingersoll–Ross (CIR) process we compute bond option and swaption prices in closed form. We also propose a short-rate specification under the risk-neutral measure that allows the yield curve to be inverted and is consistent with the CIR dynamics for the abstract short rate, thus giving rise to closed form bond option and swaption prices.}},
author = {{Bermin, Hans-Peter}},
issn = {{1350-486X}},
keywords = {{interest rates; yield curve; term structure; bonds; bond options; swaptions; square-root process; exponentially affine measure}},
language = {{eng}},
number = {{6}},
pages = {{513--534}},
publisher = {{Routledge}},
series = {{Applied Mathematical Finance}},
title = {{Bonds and Options in Exponentially Affine Bond Models}},
url = {{http://dx.doi.org/10.1080/1350486X.2011.646505}},
doi = {{10.1080/1350486X.2011.646505}},
volume = {{19}},
year = {{2012}},
}