interest rate volatility and the term structure a two factor general equilibrium model we develop a two factor general equilibrium model of the term structure the factors are the short term interest rate and the volatility of the short term interest rate we derive closed form expressions for discount bonds and study the properties of the term structure implied by the model the dependence of yields on volatility allows the model to capture many observed properties of the term structure we also derive closed form expressions for discount bond options we use hansen s generalized method of moments framework to test the cross sectional restrictions imposed by the model the tests support the two factor model there are essentially two approaches to the modeling of the term structure of interest rates in continuous time the equilibrium approach pioneered by

term premiums in bond returns abstract this paper examines expected returns on u s treasury bills and on u s government bond portfolios expected bill returns are estimated from forward rates and from sample average returns both estimation methods indicate that expected returns on bills tend to peak at eight or nine months and never increase monotonically out to twelve months reliable inferences are limited to treasury bills and thus to maturities up to a year the variability of longer term bond returns preempts precise conclusions about their expected returns

a nonlinear general equilibrium model of the term structure of interest rates abstract we derive and test an alternative closed form general equilibrium model of the term structure within the cox ingersoll and ross theoretical framework in which yields are nonlinear functions of the risk free rate we show that equilibrium bond prices and the risk free rate are not always inversely related and that bond risk need not be strictly increasing in maturity using hansen s generalized method of moments to obtain parameter estimates this nonlinear model outperforms the cox ingersoll and ross square root model in describing actual treasury bill yields for the 1964 1986 period

pricing mortgage backed securities in a multifactor interest rate environment a multivariate density estimation approach multivariate density estimation mde suggests that mortgage backed security mbs prices can be well described as a function of the level and slope of the term structure we analyze bow this function varies across mbss with different coupons an important finding is that the interest rate level proxies for the moneyness of the option the expected level of prepayments and the average life of the cash flows while the term structure slope controls for the average rate at which these cash flows should be discounted though the origination and prepayment behavior of mortgages differ substantially across coupons there remains an unexplained common factor in mbs prices this factor does not seem to be related to the usual suspects and therefore presents a puzzle to financial economists coauthors are robert f whitelaw matthew richardson and richard stanton article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

using proxies for the short rate when are three months like an instant the dynamics of the unobservable short rate are frequently estimated directly using a proxy we examine the biases resulting from this practice the proxy problem analytic results show that the proxy problem is not economically significant for single factor affine models in the two factor affine model of longstaff and schwartz 1992 the proxy problem is only economically significant for pricing discount bonds with maturities of more than five years we also describe two different numerical procedures for assessing the magnitude of the proxy problem in a general interest rate model when applied to a nonlinear single factor model they suggest that the proxy problem can be economically significant article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

technology productivity and the multinational enterprise this article reviews the relevance of the transactions costs model to the role of the firm in production and diffusion of knowledge a revival of interest in technology productivity and growth has generated a new empirical and theoretical literature a review of these developments suggests that they have not yet been reflected in significant adaptation of the conventional firm versus market concept research has been severely hampered by data gaps and suggestions are made with respect to improvements in the information base finally technology issues are and will be of increasing significance in both domestic and international policy and must be factored into the conceptual template of corporate strategy

investment tobin s q and interest rates the interest rate is a key determinant of rm investment we integrate a widelyused term structure model of interest rates cir cox ingersoll and ross 1985 with the q theory of investment hayashi 1982 and abel and eberly 1994 we show that stochastic interest rates have signicant eects on investment and rm value because capital is medium long lived capital adjustment costs have a rst order eect on investment and rm value we use duration to measure the interest rate sensitivity of rm value decompose a rm into assets in place and growth opportunities and value each component by extending the model to allow for endogenous capital liquidation we nd that the liquidation option provides a valuable protection against the increase of interest rates we further generalize the model to incorporate asymmetric adjustment costs a price wedge between purchasing and selling capital xed investment costs and irreversibility we nd that inaction is often optimal for an empirically relevant range of interest rates for rms facing xed costs or price wedges finally marginal q is equal to average q in our stochastic interest rate settings including one with serially correlated productivity shocks

the term structure of interest rates with housing abstract this paper develops a general equilibrium model to study the link between the amount of capital invested in housing assets and the term structure of interest rates in the model the production of housing assets is irreversible and housing assets can be used as collateral for borrowing funds agents decisions about consumption and investments in housing and non housing assets generate a time varying market price of risk that drives the dynamics of the term structure the calibration to u s data using the simulated method of moments technique captures the dynamics of consumption and the short and long term interest rates

interest rate volatility the yield curve and the macroeconomy abstract this paper provides theory and evidence that a low dimensional term structure model can simultaneously price bonds and related options it shows that a component of volatility risk largely unrelated to the shape of the yield curve is a determinant of expected excess returns for holding long maturity bonds it also finds evidence for this return relationship both in the model and directly in the data through regression analysis the paper also identifies a link between corporate earnings performance and interest rate volatility providing a channel driving interest rate volatility the structure of risk in the model that gives rise to these features of volatility is distinct from that inherent in recent models with unspanned stochastic volatility

the information content in bond model residuals an empirical study on the belgian bond market abstract we estimate daily vasicek cir and spline models on belgian data and compare the trading profits that can be made on the basis of their residuals abnormal returns measured using three different benchmarks are negatively related to once and twice lagged mispricing buying underpriced bonds and especially selling overpriced bonds yields significant abnormal returns even when the trade is delayed by up to five days after observing the mispricing the traditional spline model overfits the data and is least able to detect mispricing large model residuals are more likely to be the result of model misspecification or estimation than are small or medium sized residuals

national culture and expatriate deployment we hypothesize that expatriate deployment is a control function predicted by home country culture dimensions with transaction cost and agency repercussions rather than culture in the aggregate this departure from the traditional conceptualization and measurement of cultural impact also yields a hypothesized asymmetrical effect which is tested for a multi country sample of 236 multinational subsidiaries using multiple measures of national culture hypotheses are supported with assertiveness and power distance confirmed as prime predictors of expatriate deployment

semi parametric upper bounds for option prices and expected payoffs abstract upper bounds on the expected payoff of call and put options are derived these bounds depend only on the mean and variance of the terminal stock price and not on its entire distribution so they are termed semi parametric a corollary of this result is a set of upper bounds for option prices obtained by the risk neutral valuation approach of cox and ross as an example these bounds are shown to obtain across both lognormal diffusions and mixed diffusion jump processes for any given data set we present an illustrative example that suggests these bounds may be of considerable practical value

testing the bargaining hypothesis in the manufacturing sector in developing countries the bargaining power model of hc mnc host country multinational corporation interaction conceives of economic nationalism in terms of rational self interest and assumes both inherent conflict and convergent objectives in extractive industries there is strong evidence that outcomes are a function of relative bargaining power and that as power shifts to developing hcs over time the bargain obsolesces a cross national study of the bargaining model using data from 563 subsidiaries of u s manufacturing firms in forty nine developing countries indicates that while the bargaining framework is an accurate model of mnc host country relationships manufacturing is not characterized by the inherent structurally based and secular obsolescence that is found in the natural resource industries shifts in bargaining power to hcs may take place when technology is mature and global integration limited in industries characterized by changing technologies and the spread of global integration the bargain will obsolesce very slowly and the relative power of mncs may even increase over time

cross sectional versus time series estimation of term structure models empirical results for the dutch bond market abstract we compare time series and cross section estimates of the well known vasicek and cir term structure models for a dataset of daily bond prices and short term interest rates for the netherlands the main finding is the great similarity between the two models with respect to the cross sectional term structure parameter estimates and implied bond option values from a time series perspective we find that for some maturities the data reject the constant volatility vasicek model and indicate the presence of the cir volatility effects

a robust optimization approach to inventory theory we propose a general methodology based on robust optimization to address the problem of optimally controlling a supply chain subject to stochastic demand in discrete time this problem has been studied in the past using dynamic programming which suffers from dimensionality problems and assumes full knowledge of the demand distribution the proposed approach takes into account the uncertainty of the demand in the supply chain without assuming a specific distribution while remaining highly tractable and providing insight into the corresponding optimal policy it also allows adjustment of the level of robustness of the solution to trade off performance and protection against uncertainty an attractive feature of the proposed approach is its numerical tractability especially when compared to multidimensional dynamic programming problems in complex supply chains as the robust problem is of the same difficulty as the nominal problem that is a linear programming problem when there are no fixed costs and a mixed integer programming problem when fixed costs are present furthermore we show that the optimal policy obtained in the robust approach is identical to the optimal policy obtained in the nominal case for a modified and explicitly computable demand sequence in this way we show that the structure of the optimal robust policy is of the same base stock character as the optimal stochastic policy for a wide range of inventory problems in single installations series systems and general supply chains preliminary computational results are very promising

an empirical comparison of forward rate and spot rate models for valuing interest rate options our main goal is to investigate the question of which interest rate options valuation models are better suited to support the management of interest rate risk we use the german market to test seven spot and forward rate models with one and two factors for interest rate warrants for the period from 1990 to 1993 we identify a one factor forward rate model and two spot rate models with two factors that are not significantly outperformed by any of the other four models further rankings are possible if additional criteria are applied

technical note a risk and ambiguity averse extension of the max min newsvendor order formula scarf s max min order formula for the risk neutral and ambiguity averse newsvendor problem is a classical result in the field of inventory management in this article we extend scarf s formula by deriving an analogous closed form order formula for the risk and ambiguity averse newsvendor problem specifically we provide and analyze the newsvendor order quantity that maximizes the worst case expected profit versus risk trade off risk averse when only the mean and standard deviation of the product s demand distribution are known ambiguity averse and the risk is measured by the standard deviation of the newsvendor s profit we provide both analytical and numerical results to illustrate the combined effect of considering risk aversion and ambiguity aversion in computing the newsvendor order

volatility and price jumps in agricultural futures prices evidence from wheat options revised version published in american journal of agricultural economics vol 86 number 4 november 2004 1018 1031

inflation risk premia and the expectations hypothesis abstract we study the properties of the nominal and real risk premia of the term structure of interest rates we develop and solve the bond pricing implications of a structural monetary version of a real business cycle model with taxes and endogenous monetary policy we show the relation of this model with the class of essentially affine models that incorporate an endogenous state dependent market price of risk we characterize and estimate the inflation risk premium and find that over the last 40 years the ten year inflation risk premium has been has averaged 70 basis points it is time varying ranging from 20 to 140 basis points over the business cycle and its term structure is sharply upward sloping the inflation risk premium explains 23 42 of the time variation in the five ten year forward risk premium and it plays an important role in help explain deviations from the expectations hypothesis of interest rates

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

technology transfer and public policy a review of research and theory abstract my purpose is to review synthesize and criticize the voluminous multidisciplinary literature on technology transfer to reduce the literature to manageable proportions i focus chiefly not exclusively on recent literature on domestic technology transfer from universities and government laboratories i begin by examining a set of fundamental conceptual issues especially the ways in which the analytical ambiguities surrounding technology transfer concepts affect research and theory my literature review follows and i emphasize technology transfer s impact and effectiveness i employ a contingent effectiveness model of technology transfer to organize the literature as the model s name implies it assumes that technology effectiveness can take a variety of forms in addition to examining the more traditional effectiveness criteria those rooted in market impacts the model considers a number of alternative effectiveness criteria including political effectiveness capacity building

credit risk analysis of mortgage loans an application to the italian market the valuation of financial instruments in which both credit risk and interest rate risk are taken into account is an outstanding task for financial institutions in this paper we propose an affine reduced model dealing with this topic we show that this model offers analytical tractability as well as flexibility we also show that the parameters of the model can be estimated via maximum likelihood in a straightforward way to outline the procedure we estimate the model on italian data using zero coupon bond and historical default probabilities as provided by the bank of italy

bounds on contingent claims based on several assets abstract in 1987 lo derived an upper bound on the price of a european call option on a single asset lo s bound depends only on the mean and variance of the terminal asset price and is termed a semi parametric bound this paper derives similar semi parametric bounds on a european call on the maximum of any number of assets a distribution free bound for the price of this option is obtained the bound depends only on the means and covariance matrix of the returns on n underlying assets the bound is obtained by optimizing over the entries of a positive definite matrix a this can be accomplished by a technique known as semidefinite programming we demonstrate the methodology using two specific applications the first concerns the valuation of a european call option on the maximum of several assets this is known as an outperformance option and is of some practical interest the second application concerns the valuation of a discretely adjusted lookback option these lookback options are of interest in connection with certain equity annuity insurance products

option prices and the underlying asset s return distribution this work examines the relation between option prices and the true as opposed to risk neutral distribution of the underlying asset if the underlying asset follows a diffusion with an instantaneous expected return at least as large as the instantaneous risk free rate observed option prices can be used to place bounds on the moments of the true distribution an illustration of the paper s results is provided by the analysis of the information concerning the mean and standard deviation of market returns contained in the prices of s p 100 index options although it seems natural that the prices of claims to various parts of the underlying asset s distribution should contain information about the shape of that distribution cox and ross 1976 established that an option s price equals its expected payoff discounted at the risk free rate where the expectation is taken over the risk neutral rather than the true distribution of the underlying asset linking the risk neutral distribution implicit in option prices to the true distribution remains a comparative mystery a necessary condition for the risk neutral pricing methodology to be applicable is that the true and the risk neutral distribution share a common support the only information about the true distribution that can be obtained from observed option prices alone is information about that support this paper demonstrates though that observed option prices when used in conjunction with simple assume d restrictions on the true distribution do contain information about the noncentral moments of the true distribution not directly implied by those assumed restrictions alone the intuition for the result that option prices can be useful in placing bounds on the moments of the true distribution is straightforward first we generalize the results in lo 1987 to show how the expected payoff to a call can be bounded above in terms of any chosen set of the noncentral moments of the return on the underlying asset second we establish restrictions on the

a joint model for the term structure of interest rates and the macroeconomy we present and estimate a continuous time term structure model that incorporates observable macroeconomic variables and latent variables with a clear macroeconomic interpretation our model is able to accurately describe the joint dynamics for us macroeconomic variables and the yield curve however the observable variables do not explain the long end of the term structure central tendencies of these macroeconomic variables do a much better job in this respect these unobservable factors also play an important role in the description of the interest rate policy rule both observable and non observable factors determine the risk premia and hence bond excess holding returns copyright 2006 john wiley sons ltd

an equilibrium model of bond pricing and a test of market efficiency in two previous and related papers 3 4 the authors have reported the results of estimating a particular equilibrium model of bond pricing using quarterly data on canadian government bonds for the period 1964 to 1979 this paper reports the results of applying a similar model to the pricing of u s government bonds for the period 1958 1979 using data from the crsp government bond file the paper also extends the previous empirical analysis by evaluating the ability of the pricing model to detect underpriced and overpriced bonds the data reveal a strong relation between price prediction errors and subsequent bond returns

kriging of financial term structures due to the lack of reliable market information building financial term structures may be associated with a significant degree of uncertainty in this paper we propose a new term structure interpolation method that extends classical spline techniques by additionally allowing for quantification of uncertainty the proposed method is based on a generalization of kriging models with linear equality constraints market fit conditions and shape preserving conditions such as monotonicity or positivity no arbitrage conditions we define the most likely curve and show how to build confidence bands the gaussian process covariance hyper parameters under the construction constraints are estimated using cross validation techniques based on observed market quotes at different dates we demonstrate the efficiency of the method by building curves together with confidence intervals for term structures of ois discount rates of zero coupon swaps rates and of cds implied default probabilities we also show how to construct interest rate surfaces or default probability surfaces by considering time quotation dates as an additional dimension

short term interest rates as subordinated diffusions in this article we cbaracterize and estimate the process for short term interest rates using federal funds interest rate data we presume that we are observing a discrete time sample of a stationary scalar diffusion we concentrate on a class of models in whicb the local volatility elasticity is constant and the drift has aflexible specufication to accommodate missing observations and to break the link between economic time and calendar time we model the sampling scheme as an increasing process that is not directly observed we propose and implement two new methods for estimation we find evidence for a volatility elasticity between one and onehalf and two when interest rates are high local mean reversion is smaul and the mechanism for inducing stationarity is the increased volatility of the diffusion process

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

macroeconomic sources of risk in the term structure we develop a new way of modeling time variation in term premia based on the stochastic discount factor model of asset pricing the joint distribution of excess u s bond returns of different maturity and the observable fundamental macroeconomic factors is modeled using multivariate garch with conditional covariances in the mean to capture the term premia by testing the assumption of no arbitrage we derive a specification test of our model we estimate the contribution made to the term premia at different maturities through real and nominal sources of risk from the estimated term premia we recover the term structure of interest rates and examine how it varies through time finally we examine whether the reported failures of the rational expectations hypothesis can be attributed to an omitted time varying term premium

gaussian estimation of single factor continuous time models of the term structure of interest rates this article presents the first application in finance of recently developed methods for the gaussian estimation of continuous time dynamic models a range of one factor continuous time models of the short term interest rate are estimated using a discrete time model and compared to a recent discrete approximation used by chan karolyi longstaff and sanders 1992a hereafter ckls whereas the volatility of short term rates is highly sensitive to the level of rates in the united states it is not in the united kingdom the econometric estimation of continuous time models of the short term interest rate has been a relatively recent development in empirical finance see for example brown and dybvig 1986 melino and turnbull 1986 barone cuoco and zautzik 1991 babbs 1992 abken 1993 chen and scott 1993 das 1993 gibbons and ramaswamy 1993 pearson and sun 1994 lund 1994 pfann schotman and tschernig 1995 ait sahalia 1995 and broze scaillet and zakoian 1995 1 in an important study chan karolyi longstaff and sanders 1992a hereafter ckls develop a general framework to estimate and compare a range of different single factor term structure models for the short term interest rate their major conclusion is that term structure models with volatilities more highly sensitive to the level of interest rates than more generally used models have a closer empirical fit to the data in addition the functional form of the drift with or without mean reversion is of secondary importance to the correct specification of the conditional heteroskedasticity in ckls the continuous time models of the term structure are estimated using a discrete approximation we present in this article an alternative

can interest rate volatility be extracted from the cross section of bond yields most affine models of the term structure with stochastic volatility predict that the variance of the short rate should play a dual role in that it should also equal a linear combination of yields however we find that estimation of a standard affine three factor model results in a variance state variable that while instrumental in explaining the shape of the yield curve is essentially unrelated to garch estimates of the quadratic variation of the spot rate process or to implied variances from options we then investigate four factor affine models of the models tested only the model that exhibits unspanned stochastic volatility usv generates both realistic short rate volatility estimates and a good cross sectional fit our findings suggest that short rate volatility cannot be extracted from the cross section of bond prices in particular short rate volatility and convexity are only weakly correlated c 2009 elsevier b v all rights reserved

testing the empirical performance of stochastic volatility models of the short term interest rate i introduce two factor discrete time stochastic volatility models of the short term interest rate to compare the relative performance of existing and alternative empiricial specificattions i develop a nonlinear asymmmetric framework that allows for comparisons of non nested models featuring conditional heteoskedasticity and sensitivity of the volatility process to interest rate levels a new class of stochastic volatility models with asymmetric garch models the existing models are rejected in favor of the newly proposed models because of the asymmetric drift of the short rate and the presence of nonlinearity asymmetry garch and level effects in its volatility i test the predictive power of nested and non nested models in capturing the stochastic behavior of the risk free rate empirical evidence on three six and 12 month u s treasury bills indicates but that two factor stochastic volatility models are better than diffusion and garch models in forecasting the future level and volatility of interest rate changes

one factor interest rate models and the valuation of interest rate derivative securities this paper compares different approaches to developing arbitrage free models of the term structure it presents a numerical procedure that can be used to construct a wide range of one factor models of the short rate that are both markov and consistent with the initial term structure of interest rates

regime shifts in a dynamic term structure model of u s treasury bond yields this article develops and empirically implements an arbitrage free dynamic term structure model with priced factor and regime shift risks the risk factors are assumed to follow a discrete time gaussian process and regime shifts are governed by a discrete time markov process with state dependent transition probabilities this model gives closed form solutions for zero coupon bond prices an analytic representation of the likelihood function for bond yields and a natural decomposition of expected excess returns to components corresponding to regime shift and factor risks using monthly data on u s treasury zero coupon bond yields we show a critical role of priced state dependent regime shift risks in capturing the time variations in expected excess returns and document notable differences in the behaviors of the factor risk component of the expected returns across high and low volatility regimes additionally the state dependence of the regime switching probabilities is shown to capture an interesting asymmetry in the cyclical behavior of interest rates the shapes of the term structure of volatility of bond yield changes are also very different across regimes with the well known hump being largely a low volatility regime phenomenon jel g12 this article develops and empirically implements an arbitrage free dynamic term structure model dtsm with priced factor and regimeshift risks the risk factors are assumed to follow a discrete time gaussian process and regime shifts are governed by a discrete time markov process with state dependent transition probabilities agents are assumed to know both the current state of the economy and the regime they are currently in this leads to regime dependent risk neutral pricing and an equilibrium term structure that reflects the risks of both changes in the state and shifts in regimes

modeling sovereign yield spreads a case study of russian debt we construct a model for pricing sovereign debt that accounts for the risks of both default and restructuring and allows for compensation for illiquidity using a new and relatively efficient method we estimate the model using russian dollar denominated bonds we consider the determinants of the russian yield spread the yield differential across different russian bonds and the implications for market integration relative liquidity relative expected recovery rates and implied expectations of different default scenarios this paper develops a model of the termstructure of credit spreads on sovereign bonds that accommodates i default or repudiation the sovereign announces that it will stop making payments on its debt ii restructuring or renegotiation the sovereign and the lenders agree to reduce or postpone the remaining payments and iii a regime switch such as a change of government or the default of another sovereign bond that changes the perceived risk of future defaults we build on the framework of duffie and singleton 1999 showing that cash flows promised by a sovereign bond can be discounted using a default adjusted short termdiscount rate that reflects the m ean arrival rate and associated losses in market value upon arrival of each of the aforementioned types of credit events since a sovereign credit event is often not a liquidation event the model allows for continued trading and pricing of a sovereign instrument through credit events possibly after writedowns in face value or cash distributions to creditors on credit event dates additionally we accommodate the possibility that bonds issued by the same sovereign of exactly the same type but possibly of different maturities may be priced in the market using different discount factors reasons for this may include i bond covenants may not include cross default clauses that would force upon the default of one bond the simultaneous default of other bonds of the same type but of a different maturity for various strategic reasons related to internal

a comparison of inflation forecasts interest rate models provide slightly better monthly forecasts and substantially better eight and fourteen month forecasts of inflation than a univariate time series model the livingston surveys underestimate eight and fourteen month inflation rates especially during the high inflation period of 1978 81 in contrast eight and fourteen month inflation forecasts extrapolated from one month interest rates show little bias and track ex post eight and fourteen month inflation rates better than the survey forecasts

term structure views of monetary policy under alternative models of agent expectations abstract term structure models and many descriptions of the transmission of monetary policy rest on the empirical relevance of the expectations hypothesis small differences in the perceived policy reaction function in var models of agent expectations strongly influence the relevance in the transmission mechanism of the expected short rate component of bond yields mean reverting or difference stationary characterizations of interest rates require large and volatile term premiums to match the observable term structure however short rate descriptions that capture shifting perceptions of long horizon inflation evident in survey data support a more substantial term structure role for short rate expectations

real and nominal interest rates a discrete time model and its continuous time limit i provide a general equilibrium theory of the term structure of real interest rates in a discrete time economy i derive the prices for one period and two period real bonds and a simple recursive formula for general k period bonds and prove that the price formula with appropriately specified parameters converges to that of the cox ingersoll and ross model 1985 in addition i consider the behavior of nominal bond prices in a partial equilibrium setting in which an exogenous price level process is correlated with the real economy finally i provide an illustrative empirical investigation of the model the results indicate a significant correlation between the price level and the growth rate of consumption which does not support the money nuetrality assumption underlying cox ingersoll and ross s nominal bond prices and related empirical studies such as gibbons and ramaswamyu 1992 heston 1991 and pearson and sun 1991 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

pricing interest rate derivative securities this article shows that the one state variableinterest rate models of vasicek 1977 and cox ingersoll and ross 1985b can be extended sothat they are consistent with both the current termstructure of interest rates and either the currentvolatilities of all spot interest rates or the currentvolatilities of all forward interest rates theextended vasicek model is shown to be very tracta ble analytically the article compares option pricesobtained using the extended vasicek model withthose obtained using a number of other models

bond pricing and the term structure of interest rates a new methodology for contingent claims valuation this paper presents a unifying theory for valuing contingent claims under a stochastic term structure of interest rates the methodology based on the equivalent martingale measure technique takes as given an initial forward rate curve and a family of potential stochastic processee for its subsequent movements a no arbitrage condition restricts this family of processes yielding valuation formulae for interest rate sensitive contingent claims which do not explicitly depend on the market prices of risk examples are provided to illustrate the key results in relation to the term structure of interest rates arbitrage pricing theory has two purposes the first is to price all zero coupon default free bonds of varying maturities from a finite number of economic fundamentals called state variables the second is to price all interest rate sensitive contingent claims taking as given the prices of the zero coupon bonds this paper presents a general theory and a unifying framework for understanding arbitrage pricing theory in this context of which all existing arbitrage pricing models are special cases in particular vasicek 1977 brennan and schwartz 1979 langetieg 1980 ball and torous 1983 ho and lee 1986 schaefer and schwartz 1987 and artzner and delbaen 1988 the primary contribution of this paper however is a new methodology for solving the second problem i e the pricing of interest rate sensitive contingent claims given the prices of all zero coupon bonds the methodology is new because i it imposes its stochastic structure directly on the evolution of the forward rate curve ii it does not require an inversion of the term structure to eliminate the market prices of risk from contingent claim values and iii it has a stochastic spot rate process with multiple stochastic factors influencing the term structure the model can be used to consistently price and hedge all contingent claims american or european on the term structure and it is derived from necessary and more importantly sufficient conditions for the absence of arbitrage the arbitrage pricing models of vasicek 1977 brennan and schwartz 1979 langetieg 1980 and artzner and delbaen 1988 all require an iformerly titled bond pricing and the term structure of interest rates a new methodology

international technology transfer in services this study examines the nature of technology and the process of its transfer in five service industries from parent companies to foreign affiliates three principal research questions are posed what is the key technology in each industry what are the main methods for transferring this technology how and why do technology and transfer methods differ across firms industries and countries the empirical analysis shows that key technologies were generally knowledge of experience in the industry and methodology for producing the service transfer of the technology was mainly done through the training and transfer of experts and organizational forms were wholly owned subsidiaries and international partnerships more technology transfer occurred when firms were more international when affiliates were more recently established and when parent ownership was lower in the affiliate some evidence exists that more firm specific jointly produced technology leads to higher ownership percentage and greater transfer to affiliates

new keynesian macroeconomics and the term structure this article complements the structural new keynesian macro framework with a no arbitrage affine term structure model whereas our methodology is general we focus on an extended macro model with an unobservable time varying inflation target and the natural rate of output which are filtered from macro and term structure data we obtain large and significant estimates of the phillips curve and real interest rate response parameters our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks the inflation target dominates the variation in the level factor whereas the monetary policy shocks dominate the variation in the slope and curvature factors

third order extensions of lo s semiparametric bound for european call options computing semiparametric bounds for option prices is a widely studied pricing technique in contrast to parametric pricing techniques such as monte carlo simulations semiparametric pricing techniques do not require strong assumptions about the underlying asset price distribution we extend classical results in this area specifically we derive closed form semiparametric bounds for the payoff of a european call option given up to third order moment i e mean variance and skewness information on the underlying asset price we analyze how these bounds tighten the corresponding bounds when only second order moment i e mean and variance information is provided we describe applications of these results in the context of option pricing as well as in other areas such as inventory management and actuarial science

a tractable interest rate model with explicit monetary policy rates abstract this paper proposes a novel interest rate model that presents simple analytical pricing formulas for interest rate based derivatives including swaps futures swaptions caps and floors exploring the regime switching feature of markov chains the proposed model focuses on discrete changes in the central bank policy rates the main driver of short term rate fluctuations an empirical analysis shows that the proposed model generally outperforms other standard short term rate models in fitting cross sections of options prices moreover the explicit nature of policy rates to some extent enables the model to infer risk neutral probabilities of the central bank rate decisions

distributionally robust equilibrium for continuous games nash and stackelberg models abstract we develop several distributionally robust equilibrium models following the recent research surge of robust game theory in which some or all of the players in the games lack of complete information on the true probability distribution of underlying uncertainty but they need to make a decision prior to the realization of such uncertainty we start with a distributionally robust nash equilibrium model where each player uses partial information to construct a set of distributions and chooses an optimal decision on the basis of the worst distribution rather than the worst scenario to hedge the risk arising from ambiguity of the true probability distribution we investigate the existence of equilibrium develop a numerical scheme for its computation and consider special cases where the distributionally robust nash equilibrium model can be reformulated as an ordinary deterministic nash equilibrium we then extend our modeling scheme to two possible frameworks of distributionally robust stackelberg setting a distributionally robust follower model and a distributionally robust leader model these two frameworks are employed to study an innovative problem of hierarchical competition in a supply chain where a buyer not only invests in its own capacity to supply an end product market under demand uncertainty but also outsources a certain amount of market supplies to multiply competing suppliers who invest in capacity for obtaining the buyer s orders in this application we show that the buyer has more incentives to invest in capacity whereas the suppliers have less to do so when those suppliers are confronted with more demand uncertainty in the end product market over the buyer

the dynamics of the forward interest rate curve a formulation with state variables the objective of this paper is twofold first the paper develops a class of models of the term structure of interest rates in the heath jarrow and morton 1992 framework with dynamics characterized by the evolution of a small set of state variables second the paper exploits this characterization of the dynamics of the term structure in an estimation exercise that makes use of both the time series and cross section of bond prices in this way our class of models bridges the gap between traditional models such as cox ingersoll and ross 1985 and vasicek 1977 that emphasize the dynamics of interest rates and the models of heath jarrow and morton 1992 that stress fitting the cross section of bond prices

the empirical implications of the cox ingersoll ross theory of the term structure of interest rates the one factor version of the cox ingersoll and ross model of the term structure is estimated using monthly quotes on u s treasury issues trading from 1952 through 1983 using data from a single yield curve it is possible to estimate implied short and long term zero coupon rates and the implied variance of changes in short rates analysis of residuals points to a probable neglected tax effect the term structure of interest rates is important to economists because the relationship among the yields on default free securities that differ in their term to maturity reflects the information available to the market about the future course of events the expectations hypothesis the liquidity preference hypothesis hicks 10 and the market segmentation hypothesis culbertson 6 are theories of the term structure that predict little more than that the implied forward rate is either equal to or not equal to the expectation of future spot rates cox ingersoll and ross 5 cir model the term structure of interest rates in a competitive equilibrium context their model has elements in common with the earlier hypotheses of the term structure however the cir model has a rich class of empirical implications not only for the pricing of default free securities but also for the pricing of bond options callable bonds and other types of financial claims this paper examines the extent to which the model in its simplest one factor form is descriptive of the prices of u s treasury bills bonds and notes traded from 1952 to 1983 section i describes the model and the parsimonious representation of bond prices which it implies section ii describes the data and section iii outlines the preliminary results obtained by fitting the model to observed data the final section outlines directions for future research

a comparative evaluation of alternative models of the term structure of interest rates abstract in the paper alternative models of the term structure of interest rates are classified in two different approaches the no arbitrage and the general equilibrium approach it is maintained that the general equilibrium approach is superior on a theoretical ground for two main reasons first relevant variables such as the spot interest rate and the interest risk premium are endogenous second the relationship between the real and the financial side of the economy becomes a clear and important element in the understanding of the term structure as regards the applications however the advantages of the general equilibrium over the no arbitrage approach are not so clear the major role in the empiricil performance of alternative models is played by their ability to capture volatility at the current state of the literature there is no model that outperforms others in particular on the empirical side

the stochastic properties of term structure movements abstract the aim of this paper is to identify a stationary statistical model for treasury bill discount changes we find that the sample variance of discount changes are non stationary over short differencing intervals but stabilize as the intervals increase to quarterly or semi annual periods this result has important implications for pricing options and for analyzing the predictive properties of forward rates we show that the stochastic process structure leads to a downward revision in estimates of forward rate predictive power

macro factors and the term structure of interest rates this paper presents an essentially affine model of the term structure of interest rates making use of macroeconomic factors and their long run expectations the model extends the approach pioneered by kozicki and tinsley 2001 by modeling consistently long run inflation expectations simultaneously with the term structure application to the u s economy shows the importance of long run inflation expectations in the modeling of long term bond yields the paper also provides a macroeconomic interpretation for the latent factors found in standard finance models of the yield curve the level factor represents the long run inflation expectation of agents the slope factor captures business cycle conditions and the curvature factor expresses a clear independent monetary policy factor

a comparison of yield curve estimation techniques using uk data abstract i compare different methods of estimating the term structure of interest rates on a daily uk treasury bill and gilt data that spans the period from january 1995 to january 1999 in sample and out of sample statistics reveal the superior pricing ability of certain methods characterised by an exponential functional form in addition to these standard goodness of fit statistics model performance is judged in terms of two trading strategies based on model residuals both strategies reveal that parsimonious representations of the term structure perform better than their spline counterparts characterised by a linear functional form this is valid even when abnormal returns are adjusted for market movements linear splines overfit the data and are likely to give misleading results

option prices implied price processes and stochastic volatility this paper characterizes all continuous price processes that are consistent with current option prices this extends derman and kani 1994 dupire 1994 1997 and rubinstein 1994 who only consider processes with deterministic volatility our characterization implies a volatility forecast that does not require a specific model only current option prices we show how arbitrary volatility processes can be adjusted to fit current option prices exactly just as interest rate processes can be adjusted to fit bond prices exactly the procedure works with many volatility models is fast to calibrate and can price exotic options efficiently using familiar lattice techniques

exploiting the conditional density in estimating the term structure an application to the cox ingersoll and ross model we propose an empirical method that utilizes the conditional density of the state variables to estimate and test a term structure model with known price formulae using data on both discount and coupon bonds the method is applied to an extension of a two factor model due to cox ingersoll and ross 1985 cir our results show that estimates based on only bills imply unreasonably large price errors for longer maturities we reject the original cir model using a likelihood ratio test and conclude that the extended cir model also fails to provide a good description of the treasury market

the behavior of interest rates implied by the term structure of eurodollar futures this paper considers an equilibrium model of the term structure that is determined by two stochastic factors a short term interest rate and a target level to which the short rate is expected to revert a kalman filter technique that uses a time series cross section of eurodollar futures prices is developed to estimate the parameters of the model the term structures of spot libor and eurodollar futures volatility are compared to that predicted by the model the empirical results indicate that the two factor specification represents a significant improvement over its one factor version copyright 1996 by ohio state university press

empirical analysis of the yield curve the information in the data viewed through the window of cox ingersoll and ross this paper uses recent advances in bayesian estimation methods to exploit fully and efficiently the time series and cross sectional empirical restrictions of the cox ingersoll and ross model of the term structure we examine the extent to which the cross sectional data five different instruments provide information about the model we find that the time series restrictions of the two factor model are generally consistent with the data however the model s cross sectional restrictions are not we show that adding a third factor produces a significant statistical improvement but causes the average time series fit to the yields themselves to deteriorate

dynamic models of the term structure in the past 25 years tremendous progress has been made in modeling the dynamics of the term structure of interest rates which play an instrumental role in determining prices and hedging portfolios of fixed income derivative securities this article reviews the theoretical development of the dynamic models of the default free term structure and their applications in pricing interest rate options classic models sometimes termed equilibrium models and their multifactor extensions are outlined these models provide clear economic intuitions connecting the term structure with economic fundamentals they also lay a foundation for the framework of the arbitrage models that price interest rate derivatives on the basis of the market prices of bonds this framework has been expanded and enriched by recent advances in directly modeling observable market rates through the market models and in incorporating an internally consistent correlation structure through the infinite dimensional models

asymmetry and ambiguity in newsvendor models a basic assumption of the classical newsvendor model is that the probability distribution of the random demand is known but in most realistic settings only partial distribution information is available or reliably estimated the distributionally robust newsvendor model is often used in this case where the worst case expected profit is maximized over the set of distributions satisfying the known information which is usually the mean and covariance of demands however covariance does not capture information on asymmetry of the demand distribution in this paper we introduce a measure of distribution asymmetry using second order partitioned statistics semivariance is a special case with a single partition of the univariate demand with mean variance and semivariance information we show that a three point distribution achieves the worst case expected profit and derive a closed form expression for the distributionally robust order quantity for multivariate demand the distributionally robust problem

maximum likelihood estimation of latent affine processes this article develops a direct filtration based maximum likelihood methodology for estimating the parameters and realizations of latent affine processes filtration is conducted in the transform space of characteristic functions with a version of bayes rule used for recursively updating the joint characteristic function of latent variables and the data conditional upon past data an application to daily stock returns over 1953 96 reveals substantial divergences from emm based estimates in particular more substantial and time varying jump risk the implications for stock index options prices are discussed

a parametric nonlinear model of term structure dynamics recent nonparametric estimation studies pioneered by ait sahalia document that the diffusion of the short rate is similar to the parametric function r superscript 1 5 estimated by chan et al whereas the drift is substantially nonlinear in the short rate these empirical properties call into question the efficacy of the existing affine term structure models and beg for alternative models which admit the observed behavior this article presents such a model our model delivers closed form solutions for bond prices and a concave relationship between the interest rate and the yields we show that in empirical analyses our model outperforms the one factor affine models in both time series as well as cross sectional tests article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

liquidity backstops and dynamic debt runs liquidity backstops can mitigate runs in this paper we develop a dynamic model of debt runs based on he and xiong 2012 to identify both conceptually and quantitatively the value of a liquidity backstop for its run mitigating role for the purpose of identification we focus on the municipal bond markets for variable rate demand obligations and auction rate securities based on the run episodes in these markets during the financial crisis of 2007 09 and the calibrated model we find that the value of a liquidity backstop is about 14 5 basis points per annum our findings have important policy implications regarding the effectiveness of liquidity backstops in ameliorating problems of financial instability

on the relation between option and stock prices a convex optimization approach the idea of investigating the relation of option and stock prices based just on the no arbitrage assumption but without assuming any model for the underlying price dynamics has a long history in the financial economics literature we introduce convex and in particular semidefinite optimization methods duality and complexity theory to shed new light on this relation for the single stock problem given moments of the prices of the underlying assets we show that we can find best possible bounds on option prices with general payoff functions efficiently either algorithmically solving a semidefinite optimization problem or in closed form conversely given observable option prices we provide best possible bounds on moments of the prices of the underlying assets as well as on the prices of other options on the same asset by solving linear optimization problems for options that are affected by multiple stocks either directly the payoff of the option depends on multiple stocks or indirectly we have information on correlations between stock prices we find nonoptimal bounds using convex optimization methods however we show that it is np hard to find best possible bounds in multiple dimensions we extend our results to incorporate transactions costs

stochastic modeling of financial electricity contracts abstract we discuss the modeling of electricity contracts traded in many deregulated power markets these forward futures type contracts deliver either physically or financially electricity over a specified time period and is frequently referred to as swaps since they in effect represent an exchange of fixed for floating electricity price we propose to use the heath jarrow morton approach to model swap prices since the notion of a spot price is not easily defined in these markets for general stochastic dynamical models we connect the spot price the instantaneous delivery forward price and the swap price and analyze two different ways to apply the heath jarrow morton approach to swap pricing either one specifies a dynamics for the non existing instantaneous delivery forwards and derives the implied swap dynamics or one models directly on the swaps the former is shown to lead to quite complicated stochastic models for the swap price even when the forward dynamics is simple the latter has some theoretical problems due to a no arbitrage condition that has to be satisfied for swaps with overlapping delivery periods to overcome this problem a practical modeling approach is analyzed the market is supposed only to consist of non overlapping swaps and these are modelled directly a thorough empirical study is performed using data collected from nord pool our investigations demonstrate that it is possible to state reasonable models for the swap price dynamics which is analytically tractable for risk management and option pricing purposes however this is an area of further research

martingales and arbitrage in securities markets with transaction costs abstract we derive the implications from the absence of arbitrage in dynamic securities markets with bid ask spreads the absence of arbitrage is equivalent to the existence of at least an equivalent probability measure that transforms some process between the bid and the ask price processes of traded securities into a martingale the martingale measures can be interpreted as possible linear pricing rules and can be used to determine the investment opportunities available in such an economy the minimum cost at which a contingent claim can be obtained through securities trading is its largest expected value with respect to the martingale measures journal of economic literature classification numbers g11 g12 g13 d52 and d90

no arbitrage taylor rules with switching regimes we study the time varying nature of u s monetary policies summarized by the taylor rule based on a continuous time regime switching term structure model in this model the spot rate follows the taylor rule and government bonds at different maturities are priced by no arbitrage we allow the coefficients of the taylor rule and the dynamics of inflation and output gap to be regime dependent and estimate the model using government bond yields we find that the fed is proactive in controlling inflation in one regime and accommodative for growth in another moreover proactive monetary policies are associated with more stable inflation and output gap and therefore could have contributed to the great moderation our analysis also highlights the importance of switching regimes for term structure modeling without the regimes inflation and output can explain less than 50 of the variations of bond yields with the regimes the two variables can explain more than 80 of the variations of bond yields

an exploration of the forward premium puzzle in currency markets a standard empirical finding is that expected changes in exchange rates and interest rate differentials across countries are negatively related implying that uncovered interest rate parity is violated in the data this article provides new empirical evidence that suggests that violations of uncovered interest rate parity and its economic implications depend on the sign of the interest rate differentially a framework related to term structure models is developed to account for the puzzling relationship between expected changes in exchange rates and interest rate differentials estimation results suggest that a particular term structure model can account for the puzzling empirical evidence article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

optimizing bounds on security prices in incomplete markets does stochastic volatility specification matter we extend and generalize some results on bounding security prices under two stochastic volatility models that provide closed form expressions for option prices in detail we compute analytical expressions for benchmark and standard good deal bounds for both models our findings show that our benchmark results generate much tighter bounds a deep analysis of the properties of option prices and bounds involving a sensitivity analysis and analytical derivation of greeks for both option prices and bounds is also presented these results provide strong practical applications taking into account the relevance of pricing and hedging strategies for traders financial institutions and risk managers

special repo rates this article provides the causes and symptoms of special repo rates in a competitive market for repurchase agreements a repo rate is in effect an interest rate on loans collateralized by a specific instrument a special is a repo rate significantly below prevailing market riskless interest rates this article shows that specials can occur when those owning the collateral are inhibited whether from legal or institutional requirements or from frictional costs from supplying collateral into repurchase agreements specialness increases the equilibrium price for the underlying instrument by the present value of savings in borrowing costs associated with the repo specials this article characterizes competitive repurchase or repo markets and the equilibrium relationship between repo rates and the underlying cash market prices repurchase markets are often called financing markets since they are effectively vehicles for collateralized borrowing that are often used to finance the purchase of the underlying collateral this article provides causes and effects of specials meaning specific repo rates significantly below prevailing market interest rates for loans of similar maturity and credit risk the example of united states treasury instruments is emphasized because of the extensive use of the treasury repo market as a means of hedging against or speculating on changes in u s interest rates and because of the high incidence of specials in treasury repo rates numerous specific instru

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

evaluating an alternative risk preference in affine term structure models dai and singleton 2002 and duffee 2002 show that there is a tension in affine term structure models between matching the mean and the volatility of interest rates this article examines whether this tension can be solved by an alternative parametrization of the price of risk the empirical evidence suggests that first the examined parametrization is not sufficient to solve the mean volatility tension second the usual result in the estimation of affine models indicating that some of the state variables are extremely persistent may have been caused by the lack of flexibility in the parametrization of the price of risk term structure models have several uses including pricing fixed income derivatives managing the risk of fixed income portfolios and detecting relationships between the term structure of interest rates and macrovariables such as inflation and consumption to perform well in these tasks term structure models must be numerically and econometrically tractable while matching the empirical properties of the term structure movements at least two empirical properties of the term structure of interest rates have been well established by financial economists over the years see dai and singleton 2003 for a survey first the term premium or the expected excess return of treasury bonds has a high time variability second the volatility of interest rates is time varying these two properties are so prominent in the data that they will be referred to as stylized facts while these two stylized facts are very well established in the empirical literature affine term structure models are thoroughly discussed in the theoretical literature affine models are those in which the yield of zero coupon bonds are affine functions of the model state variables classic

technical note robust newsvendor competition under asymmetric information we generalize analysis of competition among newsvendors to a setting in which competitors possess asymmetric information about future demand realizations and this information is limited to knowledge of the support of demand distribution in such a setting traditional expectation based optimization criteria are not adequate and therefore we focus on the alternative criterion used in the robust optimization literature the absolute regret minimization we show existence and derive closed form expressions for the robust optimization nash equilibrium solution for a game with an arbitrary number of players this solution allows us to gain insight into the nature of robust asymmetric newsvendor competition we show that the competitive solution in the presence of information asymmetry is an intuitive extension of the robust solution for the monopolistic newsvendor problem which allows us to distill the impact of both competition and information asymmetry in addition we show that contrary to the intuition a competing newsvendor does not necessarily benefit from having better information about its own demand distribution than its competitor has

throwing away a billion dollars the cost of suboptimal exercise strategies in the swaptions market abstract this paper studies the costs of applying single factor exercise strategies to american swap options when the term structure is actually driven by multiple factors using a multifactor string market model of the term structure we find that even when single factor models are recalibrated to match the market at every exercise date the exercise strategies they imply can be suboptimal based on estimates of notional amounts outstanding the total present value costs of following single factor strategies could be several billion dollars these results illustrate the importance of using well specified term structure models

term structure movements and pricing interest rate contingent claims this paper derives an arbitrage free interest rate movements model ar model this model takes the complete term structure as given and derives the subsequent stochastic movement of the term structure such that the movement is arbitrage free we then show that the ar model can be used to price interest rate contingent claims relative to the observed complete term structure of interest rates this paper also studies the behavior and the economics of the model our approach can be used to price a broad range of interest rate contingent claims including bond options and callable bonds

a test of the cox ingersoll and ross model of the term structure we test the theory of the term structure of indexed bond prices due to cox ingersoll and ross cir the econometric method uses hansen s generalized method of moments and exploits the probability distribution of the single state variable in cir s model thus avoiding the use of aggregate consumption data it enables us to estimate a continuous time model based on discretely sampled data the tests indicate that cir s model for index bonds performs reasonably well when confronted with short term treasury bill returns the estimates indicate that term premiums are positive and that yield curves can take several shapes however the fitted model does poorly in explaining the serial correlation in real treasury bill returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a theory of the nominal term structure of interest rates a model of the nominal term structure of interest rates is developed that has a positive and stationary process for the interest rate and delivers closed form expressions for the prices of discount bonds and european options on bonds unlike the one state variable version of the cox ingersoll and ross 1985 model this model even in its one state variable version allows the term premium to change sign as a function of the state and the term to maturity and also allows for shapes of the yield curve that are observed in the u s data but that are disallowed in the cox ingersoll and ross model article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

bounds and prices of currency cross rate options abstract this paper derives the pricing bounds of a currency cross rate option using the option prices of two related dollar rates via a copula theory and presents the analytical properties of the bounds under the gaussian framework our option pricing bounds are useful because 1 they are general in the sense that they do not rely on the distribution assumptions of the state variables or on the selection of the copula function 2 they are portfolios of the dollar rate options and hence are potential hedging instruments for cross rate options and 3 they can be applied to generate bounds on deltas the empirical tests suggest that there are persistent and stable relationships between the market prices and the estimated bounds of the cross rate options and that our option pricing bounds obtained from the market prices of options on two dollar rates and the historical correlation of two dollar rates are highly informative for explaining the prices of the cross rate options moreover the empirical results are consistent with the predictions of the analytical properties under the gaussian framework and are robust in various aspects

affine model of inflation indexed derivatives and inflation risk premium abstract this paper proposes an affine based approach which jointly captures the nominal interest rate the real interest rate and the inflation risk premium to price inflation indexed derivatives including zero coupon inflation indexed swaps year on year inflation indexed swaps inflation indexed swaptions and inflation indexed caps and floors we provide an example and explain how to use traded zero coupon inflation indexed swap rates to estimate inflation risk premiums

a cyclical square root model for the term structure of interest rates this paper presents a cyclical square root model for the term structure of interest rates assuming that the spot rate converges to a certain time dependent long term level this model incorporates the fact that the interest rate volatility depends on the interest rate level and specifies the mean reversion level and the interest rate volatility using harmonic oscillators in this way we incorporate a good deal of flexibility and provide a high analytical tractability under these assumptions we compute closed form expressions for the values of different fixed income and interest rate derivatives finally we analyze the empirical performance of the cyclical model versus that proposed in cox et al 1985 and show that it outperforms this benchmark providing a better fitting to market data

service multinationals conceptualization measurement and theory the application of mne definitions measurements and theories to international services is still in its infancy despite the considerable size and growth of this sector there are problems in defining classifying measuring comparing and explaining service mnes but they do not require special definitions and theories still research to date suggests 1 delinking the concepts of multinational enterprise and foreign direct investment under certain conditions and 2 qualifying the nature of ownership internalization and location advantages in fdi theory as far as service mnes are concerned