Abstract
In part III of the study we explore a new approach in modeling the term structure of interest rates and the pricing of fixed income instruments. The pricing model we present is a type within the affine class and is estimated using interest rate panel data. This first chapter considers the peculiarities of modeling and pricing assets in an incomplete market such as the market for fixed income instruments. We clear the basic definitional terminology when dealing with bond prices and interest rates and motivate our choice of model type. In chapter 12 we present our dynamic term structure model and derive a closed-form solution for the price of discount bonds as the security of primary interest. In the next chapter we perform a comparative statistic in order to evaluate the characteristic theoretical properties of our interest rate model. Here, we especially examine the distinct behavior of the term structure of interest rates as well as the term structure of volatilities which are relevant in valuing derivatives. The following chapter 14 is dedicated to the management of interest rate risk. Starting with a clarification of the types of risk involved, we show how to implement the duration technique for our model, and finally show how to price term structure derivatives. Among the most relevant fixed income instruments in risk management we specialize in valuing bond options, swap contracts, and interest rate floor and cap agreements.
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References
See, for example, Campbell, Lo, and MacKinlay (1997).
See, for example, Bliss (1997) and Uhrig and Walter (1996).
Also known as accumulator or savings account.
If one would implement a multi factor regression, this would possibly give rise to a lulticolinnearity problem. See the analysis of chapter 15.
Brennan and Schwartz (1979, p. 134).
For a valuation of derivative contracts based on no-arbitrage see, for example, Schöbel (1995b, ch. 2).
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© 2001 Springer-Verlag Berlin Heidelberg
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Kellerhals, B.P. (2001). Introduction. In: Financial Pricing Models in Continuous Time and Kalman Filtering. Lecture Notes in Economics and Mathematical Systems, vol 506. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-21901-0_11
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DOI: https://doi.org/10.1007/978-3-662-21901-0_11
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-540-42364-5
Online ISBN: 978-3-662-21901-0
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