Restrictions On Risk Prices In Dynamic Term Structure Models
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| Author | : Michael Bauer |
| Publisher | : |
| Total Pages | : 55 |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
Restrictions on the risk-pricing in dynamic term structure models (DTSMs) can unleash the power of no-arbitrage by creating a tighter link between cross-sectional and time-series variation of interest rates. This paper presents a new econometric framework for estimation of affine Gaussian DTSMs under restrictions on risk prices, which addresses the issues of a large model space and of model uncertainty using a Bayesian approach. A simulation study demonstrates the good performance of the proposed method, both for model choice and for inference about the objects of interest. I obtain novel results for the U.S. Treasury yield curve. The data strongly favor tight restrictions on risk pricing: only level risk is priced, and only changes in the slope affect term premia. Incorporating the restrictions into an otherwise standard model substantially alters its conclusions. Interest rate persistence is significantly higher than in a maximally-flexible model, hence expectations of future short rates are more variable, and the role for term premia is somewhat diminished. Hence, restrictions on risk prices help resolve the puzzle of implausibly stable short-rate expectations which has plagued this literature. Restricted models attribute a larger share of the secular decline in long-term interest rates over the last twenty years to the expectations component, consistent with survey evidence on expectations of future interest rates and inflation.
| Author | : Ako Doffou |
| Publisher | : |
| Total Pages | : 27 |
| Release | : 2013 |
| Genre | : |
| ISBN | : |
Enormous progress has been made by academics and finance practitioners alike in modeling the dynamics of the term structure of interest rates in the past 35 years. This paper extends Yan (2001). The dynamics of the term structure of interest rates are critical in assessing prices and hedging portfolios of fixed-income derivative instruments. This paper reviews the theoretical development of the dynamic models of the default-free term structure and their applications in pricing interest rate options. Equilibrium models and their multifactor extensions are examined. These models offer the economic intuition linking the term structure to economic fundamentals. These models also constitute a framework of the arbitrage models which price interest rate derivatives using the market prices of bonds. Recent studies expand this framework, directly model observable market rates, incorporate an internally consistent correlation structure, use pricing factors as observable portfolios of zero-coupon yields acting as state variables, offer a discrete time setting with recursive closed form solutions for zero coupon bonds, have unconstrained state dependence of the market prices of risk, build in smoothness restrictions on the factor loadings, and are driven by state vectors with unspanned macro risks.
| Author | : Francis X. Diebold |
| Publisher | : Princeton University Press |
| Total Pages | : 223 |
| Release | : 2013-01-15 |
| Genre | : Business & Economics |
| ISBN | : 0691146802 |
Understanding the dynamic evolution of the yield curve is critical to many financial tasks, including pricing financial assets and their derivatives, managing financial risk, allocating portfolios, structuring fiscal debt, conducting monetary policy, and valuing capital goods. Unfortunately, most yield curve models tend to be theoretically rigorous but empirically disappointing, or empirically successful but theoretically lacking. In this book, Francis Diebold and Glenn Rudebusch propose two extensions of the classic yield curve model of Nelson and Siegel that are both theoretically rigorous and empirically successful. The first extension is the dynamic Nelson-Siegel model (DNS), while the second takes this dynamic version and makes it arbitrage-free (AFNS). Diebold and Rudebusch show how these two models are just slightly different implementations of a single unified approach to dynamic yield curve modeling and forecasting. They emphasize both descriptive and efficient-markets aspects, they pay special attention to the links between the yield curve and macroeconomic fundamentals, and they show why DNS and AFNS are likely to remain of lasting appeal even as alternative arbitrage-free models are developed. Based on the Econometric and Tinbergen Institutes Lectures, Yield Curve Modeling and Forecasting contains essential tools with enhanced utility for academics, central banks, governments, and industry.
| Author | : Qiang Dai |
| Publisher | : |
| Total Pages | : 39 |
| Release | : 2008 |
| Genre | : |
| ISBN | : |
This paper develops a rich class of discrete-time, nonlinear dynamic term structure models (DTSMs). Under the risk-neutral measure, the distribution of the state vector Xt resides within a family of discrete-time affine processes that nests the exact discrete-time counter parts of the entire class of continuous-time models in Duffie and Kan (1996) and Dai and Singleton (2000). Moreover, we allow the market price of risk curren;t, linking the risk-neutral and historical distributions of X, to depend generally on the state Xt. The conditionallikelihood functions for coupon bond yields for the resulting nonlinear models under thehistorical measure are known exactly in closed form. As an illustration of our approach, we estimate a three factor model with a cubic term in the drift of the stochastic volatility factor and compare it to a model with a linear drift. Our results show that inclusion of a cubic term in the drift significantly improves the models statistical fit as well as its out-of-sampleforecasting performance.
| Author | : Sanjay K. Nawalkha |
| Publisher | : John Wiley & Sons |
| Total Pages | : 722 |
| Release | : 2007-05-23 |
| Genre | : Business & Economics |
| ISBN | : 0470140062 |
Praise for Dynamic Term Structure Modeling "This book offers the most comprehensive coverage of term-structure models I have seen so far, encompassing equilibrium and no-arbitrage models in a new framework, along with the major solution techniques using trees, PDE methods, Fourier methods, and approximations. It is an essential reference for academics and practitioners alike." --Sanjiv Ranjan Das Professor of Finance, Santa Clara University, California, coeditor, Journal of Derivatives "Bravo! This is an exhaustive analysis of the yield curve dynamics. It is clear, pedagogically impressive, well presented, and to the point." --Nassim Nicholas Taleb author, Dynamic Hedging and The Black Swan "Nawalkha, Beliaeva, and Soto have put together a comprehensive, up-to-date textbook on modern dynamic term structure modeling. It is both accessible and rigorous and should be of tremendous interest to anyone who wants to learn about state-of-the-art fixed income modeling. It provides many numerical examples that will be valuable to readers interested in the practical implementations of these models." --Pierre Collin-Dufresne Associate Professor of Finance, UC Berkeley "The book provides a comprehensive description of the continuous time interest rate models. It serves an important part of the trilogy, useful for financial engineers to grasp the theoretical underpinnings and the practical implementation." --Thomas S. Y. Ho, PHD President, Thomas Ho Company, Ltd, coauthor, The Oxford Guide to Financial Modeling
| Author | : Michael Henseler |
| Publisher | : |
| Total Pages | : 30 |
| Release | : 2018 |
| Genre | : |
| ISBN | : |
We present an affine arbitrage-free dynamic term-structure model based on a representation of instantaneous forward rates as sum of exponentials. The model, which is Gaussian and belongs to the class of Heath-Jarrow-Morton-type models, is intuitively appealing as a suitable linear combination of the stochastic factors can be interpreted as stochastic evolution of stable principal components of the yield curve. Focusing on applications, we derive general principal components in such an affine-linear model, calibrate the model to government bond prices, and derive simple formulas to price caps and floors.
| Author | : |
| Publisher | : |
| Total Pages | : |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
| Author | : Dennis Bams |
| Publisher | : |
| Total Pages | : 54 |
| Release | : 1998 |
| Genre | : Affine algebraic groups |
| ISBN | : |
| Author | : Qiang Dai |
| Publisher | : |
| Total Pages | : 32 |
| Release | : 2001 |
| Genre | : |
| ISBN | : |
Though linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional quot;expectations theory,quot; we show that these findings are not puzzling relative to a large class of richer dynamic term structure models. Specifically, we are able to match all of the key empirical findings reported by Fama and Bliss and Campbell and Shiller, among others, within large subclasses of affine and quadratic-Gaussian term structure models. Key to this matching are parameterizations of the market prices of risk that let us separately quot;controlquot; the shape of the mean yield curve and the correlation structure of excess returns with the slope of the yield curve. The risk premiums have a simple form consistent with Fama's findings on the predictability of forward rates, and are shown to also be consistent with interest rate, feedback rules used by a monetary authority in setting monetary policy.
| Author | : |
| Publisher | : Lulu.com |
| Total Pages | : 294 |
| Release | : 2004 |
| Genre | : Bank capital |
| ISBN | : 9291316695 |
