jump diffusion processes and the term structure of interest rates the authors investigate the term structure of interest rates when the underlying state variables and production technologies follow the jump diffusion processes even in some cases where the traditional expectations theory about the term structure is consistent with general equilibrium under diffusion processes the traditional theory is not consistent under jump diffusion processes it is shown that bond prices are strictly higher under jump risks than otherwise and that consumers with logarithmic utility functions will develop hedge portfolios in the presence of jump diffusion a number of continuous time asset pricing models have been derived under stochastic diffusion processes with continuous sample paths see e g black and scholes 2 merton 21 breeden 3 and cox ingersoll and ross 8 however recent empirical studies see e g brown and dybvig 4 feinstone 10 and jarrow and rosenfeld 17 suggest that the underlying processes may follow

location and attendance in major league baseball this study uses a travel cost model to analyse the attendance impacts on major league baseball mlb of the closest substitute mlb team it is found that the closer two teams are the lower attendance is at each team relative to two teams that are farther apart in addition when a new team moves into the area of an existing team there is an additional initial reduction in attendance for the incumbent team this has implications for actions aimed at changing the number of teams in mlb either by contraction or by possible antitrust approaches that would increase the number of teams especially in megalopolis markets further and consistent with past demand studies pricing is in the inelastic portion of gate demand and fan loyalty is a significant contributor to the estimation of gate attendance

the effect of multiple extrinsic cues on quality perceptions a matter of consistency building on past research this article illustrates when a price quality relationship holds in the presence of multiple extrinsic cues when intrinsic information is scarce the relationship is more pronounced when a positive price cue is paired with a positive second cue e g strong warranty positive country of origin or strong brand when the two cues are inconsistent consumers find the negative cue more salient and overweight it in their evaluations this interaction is moderated by the presence of abundant levels of intrinsic attribute information our predictions are replicated across five studies and the underlying process is supported

the role of price in multi attribute product evaluations the potentially multifaceted role of price in product evaluations is investigated with an empirical analysis of surveyed beliefs attitudes and intentions regarding automobile brands it is found that price beliefs both influence and are influenced by beliefs about a brand s quality thereby contributing to the attribution definition process however price is not a significant determinant of overall attitude it is also found that price becomes a negative factor when behavioral intentions are involved lending support to an economic interpretation of price

is nonlinear drift implied by the short end of the term structure nonlinear drift models of the short rate are estimated using data on the short end of the term structure where the cross sectional relation is obtained by an analytical approximation the findings reveal that i nonlinear physical drift is not implied unless it is strongly affected by cross sectional dimensions of the data ii nonlinear risk neutral drift that allows for fast mean reversion for high rates is desirable to explain and predict observed patterns of yield spreads and iii for higher frequency data from which transitory shocks are removed ii still remains valid although the nonlinearity is somewhat reduced

duration models and irr management a question of dimensions abstract this paper compares the immunization performance of alternative single and multiple factor duration models using spanish government bond data over 1 2 and 3 year horizons the aim is to assess whether the success of duration matching strategies is primarily attributable to the particular model chosen or to the number of risk factors considered empirical tests show that i traditional immunization is easily bettered by more realistic strategies ii the number of risk factors considered has a greater influence on the result than the particular model chosen and iii three factor immunization strategies offer the highest immunization benchmarks

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

china s official rates and bond yields abstract recent research shows that bond yields are influenced by monetary policy decisions to learn how this works in a bond market that differs significantly from those in the us and europe we model chinese bond yields using the one year deposit interest rate as a state variable we also include the spread between the one year market interest rate and the one year deposit interest rate as another factor the model is developed in an affine framework and closed form solutions are obtained we then test the model empirically with a markov chain monte carlo simulation procedure the results show that the new model that incorporates the official rate in china characterizes the changing shape of the yield curve well

the price elasticity of mass preferences i compare the price elasticity of economic and political preferences my central hypothesis is that willingness to pay whether expressed verbally or through cash transactions is more price elastic for economic consumption goods than for public goods i find that increases in price greatly diminish the proportion of people willing to pay for consumer goods such as housing or hardback books whereas the proportion willing to pay more in taxes to support a public good such as environmental protection or shelter for the homeless is much less responsive to changes in price i conclude by discussing the theoretical and political implications of willingness to pay for public and private goods

de noising option prices with the wavelet method financial time series are known to carry noise hence techniques to de noise such data deserve great attention wavelet analysis is widely used in science and engineering to de noise data in this paper we show through the use of monte carlo simulations the power of the wavelet method in the de noising of option price data we also find that the estimation of risk neutral density functions and out of sample price forecasting is significantly improved after noise is removed using the wavelet method

contextual influences on perceptions of merchant supplied reference prices two contextual variables that have theoretical roots in information processing attribution and social judgment theories were manipulated along with three levels of merchant supplied reference price in a 2 2 3 analysis of variance design results support the hypothesized effects of consistency and distinctiveness as contextual variables that influence internal price standards and purchase evaluations the three price levels resulted in a curvilinear pattern of results for the purchase evaluation and source credibility dependent variables as hypothesized however contrary to assimilation contrast theory the impact of the merchant supplied reference price on estimates of normal and fair prices was monotonic

long forward and zero coupon rates can never fall in frictionless markets having no arbitrage the asymptotic zero coupon rate never falls the same is true of the long forward rate the long par coupon rate can rise and fall due to forward rate movements at short maturities this article relates the three types of interest rates and formalizes and proves the impossibility results for falling asymptotic rates these results can be tested in a parametric term structure specification that is rich enough to identify a time series of long rates the results show that it is not possible to specify arbitrarily the long forward or zero coupon rate process copyright 1996 by university of chicago press

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

an evaluation of contingent immunization abstract this paper tests the effectiveness of contingent immunization a stop loss strategy that allows portfolio managers to take advantage of their ability to forecast interest rate movements as long as their forecasts are successful but switches to a pure immunization strategy should the stop loss limit be encountered this study uses actual daily transactions in the spanish treasury market covering the period 1993 2003 and uses performance measures that accounts for skewness and kurtosis as well as mean variance the main result of this paper is that contingent immunization provides excellent performance despite its simplicity

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

measuring managerial efficiency the case of baseball in economic analysis the role of the entrepreneur is paramount to the production process the entrepreneur is engaged in a darwinian game of efficiently transforming scarce resource inputs into outputs in the modern business organization this role is delegated to managers despite the conceptual importance of the role of management in the production function very little is known about the actual effect on output of variations in managerial skill in part this is due to the lack of proprietory data in part it is due to difficulties in measuring the outputs and inputs of complex production processes in a meaningful way a number of investigators have employed the concept of the frontier production function as developed by forsund and hjalmarsson 1 and timmer 6 and more recently by schmidt and lovell 3 to measure the effect on technical and price efficiency of various property rights structures or institutional constraints to our knowledge estimates of managerial efficiency have not been obtained with firm specific data except for some regulated industries in this study we estimate managerial efficiency by manager and by firm managerial marginal revenue product the rate of change in managerial efficiency over years of experience and relative factor price efficiency we use major league baseball teams over the period 1961 1980 as our data source what is particularly appealing about the choice of major league baseball teams as the industry for analysis is that outputs win percent and inputs player skills are unambiguously measured and the production function is simply specified as shown by scully 5 our results indicate that managerial skill in baseball contributes very substantially to the production process the paper will evolve as follows first the concept of the frontier production function is briefly outlined then estimates of managerial efficiency by manager and by team are provided and discussed a managerial efficiency learning curve is estimated an estimate of managerial marginal revenue product provided and the managerial efficiency

a risk minimizing strategy for portfolio immunization consider a fixed income portfolio whose duration is equal to the length of a given investment horizon it is shown that there is a lower limit on the change in the end ofhorizon value of the portfolio resulting from any given change in the structure of interest rates this lower limit is the product of two terms of which one is a function of the interest rate change only and the other depends only on the structure of the portfolio consequently this second term provides a measure of immunization risk if this measure is minimized the exposure of the portfolio to any interest rate change is the lowest the traditional theory of immunization as formalized by fisher and weil 6 defines the conditions under which the value of an investment in a bond portfolio is protected against changes in the level of interest rates the specific assumptions of this theory are that the portfolio is valued at a fixed horizon date that there are no cash inflows or outflows within the horizon and that interest rates change only by a parallel shift in the forward rates under these assumptions a portfolio is said to be immunized if its value at the end of the horizon does not fall below the target value where the target value is defined as the portfolio value at the horizon date under the scenario of no change in the forward rates the main result of this theory is that immunization is achieved if the duration of the portfolio is equal to the length of the horizon the assumption that interest rates can only change by a parallel shift that is by the same amount for all maturities has been the subject of considerable concern bierwag 1 2 bierwag and kaufman 3 khang 7 and others have postulated alternative models of interest rate behaviors each of these specifications implies a different measure of duration with immunization attained if this duration measure is equal to the horizon length a limitation of this approach is that the portfolio is protected only against the particular type of interest rate change assumed in a more recent development cox et al 5 brennan and schwartz 4 and others have investigated immunization conditions when interest rates are governed by a continuous process consistent with a market equilibrium depending on the specilfication of the interest rate process there is a duration like measure possibly multidimensional as in brennan and schwartz such that the portfolio is immunized if a proper value of this measure is maintained this assumes a continuous rebalancing of the portfolio again immunization is achieved only if interest rate changes conform to the specific process assumed in this paper we wish to pursue a different approach if it turned out that the

monte carlo methods for security pricing the monte carlo approach has proved to be a valuable and flexible computational tool in modern finance this paper discusses some of the recent applications of the monte carlo method to security pricing problems with emphasis on improvements in efficiency we first review some variance reduction methods that have proved useful in finance then we describe the use of deterministic low discrepancy sequences also known as quasi monte carlo methods for the valuation of complex derivative securities we summarize some recent applications of the monte carlo method to the estimation of partial derivatives or risk sensitivities and to the valuation of american options we conclude by mentioning other applications

competitive inventory management in treasury markets abstract we decompose us treasury bid ask spreads into inventory adverse selection and order processing costs by using the fact that inventory trades have different effects on spreads than do proprietary trades we exploit this asymmetry and develop a technique to identify the three components of the spread in order to test three hypotheses dealers make larger changes to inventory 1 following macroeconomic announcements 2 at the start and toward the end of the new york trading hours and 3 when transaction sizes are relatively large we test these predictions using govpx data for on the run 2 year and 10 year treasury notes all three predictions are supported we also assess how primary dealers react to the federal reserve s open market operations omos our findings reveal interesting intraday patterns in the inventory component for both securities

short term interest rate dynamics a spatial approach abstract we use new fully functional methods to describe and study the dynamics of the short term interest rate process in continuous time the suggested procedure exploits the spatial properties embodied in the local time process of the diffusion of interest and is robust against deviations from stationarity our results indicate that the misspecification of a standard constant elasticity of variance model with linear mean reverting drift cannot be attributed to the nonlinear behavior of the infinitesimal first moment of the short term interest rate process at high rates rather it should be attributed to the martingale nature of the process over most of its empirical range i e between 3 and about 15

designing an immunized portfolio is m squared the key abstract the theoretical and empirical properties of m squared a measure of cash flow dispersion used in designing duration hedged portfolios are examined contrary to prior research minimizing m squared is not independent of the stochastic process and the minimum m squared portfolio is a bullet only under a specific convexity condition derived in the paper using a data base of default free government of canada bonds to set up minimum m squared duration matching portfolios we find that the convexity property does not hold in general and that minimum m squared portfolios fail to hedge as effectively as portfolios including a bond maturing on the horizon date

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

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

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

analysing the technical efficiency of the spanish football league first division with a random frontier model this article analyses technical efficiency of football clubs in the spanish football league division 1 primera liga from the seasons 1995 1996 to 2004 2005 with an unbalanced panel data the random frontier model is used allowing the identification of random variables in the cost frontier it is concluded that the price of capital investment the number of points won and attendance are heterogeneous variables therefore no common public policy aiming to improve efficiency can embrace all of the clubs so that policies by clusters are required

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

immunization derived from a polynomial duration vector in the spanish bond market abstract this paper focuses on the spanish government debt market in an attempt to evaluate the immunization performance of the polynomial duration model of chambers and carleton chambers d r carleton w t 1988 a generalized approach to duration in chen a h ed research in finance vol 7 jai press greenwich pp 163 181 in default free and option free fixed income portfolios and to ascertain whether traditional convexity is an earnings generating element empirical tests show that three constraints namely those related to the level slope and curvature of term structure shifts are necessary to guarantee a return close to the target the only exception to this rule is found in portfolios including an asset that matures near the horizon date in which classical immunization performs properly

a markovian framework in multi factor heath jarrow morton models we consider the general n factor heath jarrow and morton model 1992 and provide a sufficient condition on the volatility structure for the spot rate process to be markovian with 2 n state variables the price of a discount bond is also markovian with the same state variables and hence claims against the term structure can be efficiently priced using standard simulation techniques our results extend earlier works such as ritchken and sankarasubramanian 1995 where the one factor model is treated and carverhill 1994 where the volatility structure is non random numerical experiments show that our model can explain the volatility smile observed in the interest rate options market and also overcome the biases noted by flesaker 1993

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 bayesian stochastic frontier of italian football this study analyses the technical efficiency of serie a italian football clubs during the 2004 2012 seasons with a bayesian stochastic frontier model using unique data extracted from clubs annual reports specifically the focus of the study is on assessing the impact effects on clubs efficiency whether they are big clubs they employ several foreign player they compete in european competitions and their involvement with football scandals in the italian football the empirical results reveal that efficiency varies among the clubs analysed and policy implications are derived

cost efficiency of french rugby clubs this article analyses the cost efficiency of french first league rugby clubs using a stochastic frontier model the frontier estimation confirmed that the model fits the data well with all coefficients correctly signed and in line with the theoretical requirements the results show that one of the clubs is operating efficiently with the majority of clubs clustered around 20 inefficiency policy implications are derived

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

immunization using a stochastic process independent multi factor model the portuguese experience abstract in this paper we evaluate the relative immunization performance of the m vector proposed by nawalkha and chambers 1997 nawalkha s k chambers d r 1997 the m vector model derivation and testing of extensions to m squared the journal of portfolio management 23 92 98 using data for the portuguese government debt market empirical results show that i immunization models single and multi factor remove most of the interest rate risk underlying a more naive maturity strategy ii duration matching portfolios constrained to include the maturity bond and formed using a single factor model provide the best immunization performance overall particularly in highly volatile term structure environments and shorter holding periods iii varying the rebalancing frequency and the investment horizon shows that these results are less robust for portugal than for other countries

fundamental properties of bond prices in models of the short term rate this article develops restrictions that arbitrage constrained bond prices impose on the short term rate process in order to be consistent with given dynamic properties of the term structure of interest rates the central focus is the relationship between bond prices and the short term rate volatility in both scalar and multidimensional diffusion settings typical relationships between bond prices and volatility are generated by joint restrictions on the risk neutralized drift functions of the state variables and convexity of bond prices with respect to the short term rate the theory is illustrated by several examples and is partially extended to accommodate the occurrence of jumps and default a standard approach to modeling the term structure of interest rates is to derive sets of arbitrage free bond prices using as an input an exogenously given short term rate process see e g vasicek 1977 and cox ingersoll and ross 1985 while this approach is widely used there is no theoretically sound work establishing systematic answers to such fundamental questions as when are bond prices a decreasing function of the shortterm rate when are bond prices a convex function of the short term rate are bond prices a decreasing function of the short term rate volatility this article demonstrates that it is possible to develop results addressing these questions in relation to all sets of economically admissible i e noarbitrage bond prices

the demand for league football a demand equation is estimated for total football league attendances for the period 1948 49 to 1979 80 plausible values are obtained for the elasticities of demand with respect to income and to a price variable which includes the cost of travel to the stadium the values imply that football spectating is an inferior good with a low price elasticity equations are also estimated for the league s separate divisions the implications of the results for the football league clubs are discussed

a one factor model of interest rates and its application to treasury bond options 1990 a one factor model of interest rates and its application to treasury bond options financial analysts journal vol 46 no 1 pp 33 39

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

the brazilian soccer championship an efficiency analysis this article analyses the top brazilian football league from 2003 to 2011 by estimating a cost function and using a stochastic frontier model among the covariates the number of fans per club and club remoteness is taken into account the brazilian clubs are then ranked according to their technical efficiency during the 2000 2011 period based on the results the policy implication is presented and the economic implications arising from the study are also considered

an improved immunization strategy m absolute current immunization models have limited power in interest rate risk protection a new approach entitled m absolute is designed to provide powerful and practical single risk measure immunization in particular circumstances m absolute is similar to m square but is derived as a first order lower bound immunization risk model like duration m absolute can be implemented as a simple single risk measure immunization model m absolute of a bond is defined as the weighted average of the absolute distances of the bond s cash flows from a horizon point even though it is a single risk measure m absolute can act effectively to reduce the impacts of several types of interest rate risks rather than hedge against only a single type of term structure shift empirical tests show that m absolute reduces the interest rate risk inherent in the traditional duration model by more than half these results are independent of the particular time period chosen

arbitrage opportunities in arbitrage free models of bond pricing mathematical models of bond pricing are used by both academics and wall street practitioners with practitioners introducing time dependent parameters to fit arbitrage free models to selected asset prices we show in a simple one factor setting that the ability of such models to reproduce a subset of security prices need not extend to state contingent claims more generally we argue that the additional parameters of arbitrage free models should be complemented by close attention to fundamentals which might include mean reversion multiple factors stochastic volatility and or nonnormal interest rate distributions

do bonds span the fixed income markets theory and evidence for unspanned stochastic volatility most term structure models assume bond markets are complete that is that all fixed income derivatives can be perfectly replicated using solely bonds however we find that in practice swap rates have limited explanatory power for returns on at the money straddles portfolios mainly exposed to volatility risk we term this empirical feature unspanned stochastic volatility usv while usv can be captured within an hjm framework we demonstrate that bivariate models cannot exhibit usv we determine necessary and sufficient conditions for trivariate markov affine systems to exhibit usv for such usv models bonds alone may not be sufficient to identify all parameters rather derivatives are needed

the pricing of options on default free bonds recent developments in the finance literature dealing with the valuation of contingent claims have been triggered by black and scholes 2 with their valuation of european options on corporate stocks the type of valuation model derived by black and scholes is attractive because it is independent of preferences this independence is possible due to the fact that the contingent claims are usually assumed to be contingent on traded assets or traded state variables for example a european call option is a claim contingent on the value of the corresponding stock to maintain the independence of the claim from preferences however some variables have to be discarded and considered as constants for example the rate of interest which is not a traded state variable is considered a constant in most of the literature see black and scholes 2 merton 11 and ingersoll 9 though this approximation might not cause important discrepancies in the case of corporate liabilities and options on corporate liabilities the effect of such an approximation on the value of default free bonds and options on default free bonds is more important since these liabilities depend only on the rate of interest

nonparametric modeling of u s interest rate term structure dynamics and implications on the prices of derivative securities this paper develops a nonparametric model of interest rate term structure dynamics based on a spot rate process that permits only positive interest rates and a market price of interest rate risk that precludes arbitrage opportunities both the spot rate process and the mar ket price of interest rate risk are nonparametrically specified so that the model allows for maximal flexibility in fitting into the data marginal density of interest rates and historical term structure data are exploited to provide robust estimation of the nonparametric term structure model the model is implemented using u s data and the estimation results are compared to those in the available literature empirical results not only provide strong evidence that most traditional spot rate models and market prices of interest rate risk are misspecified but also confirm that the nonparametric model generates significantly differ ent term structures and prices of common derivatives

a new measure of cross sectional risk and its empirical implications for portfolio risk management abstract litterman et al litterman r scheinkman j weiss l 1991 volatility and the yield curve journal of fixed income 1 june 49 53 and engle and ng engle r f ng v k 1993 time varying volatility and the dynamic behavior of the term structure journal of money credit and banking 25 3 336 349 provide empirical evidence of a relation between yield curve shape and volatility this study offers theoretical support for that finding in the general context of cross sectional time series we introduce a new risk measure quantifying the link between cross sectional shape and market risk a simple econometric procedure allows us to represent the risk experienced by cross sections over a time period in terms of independent factors reproducing possible cross sectional deformations we compare our risk measure to the traditional cross yield covariance according to their relative performance empirical investigation in the us interest rate market shows that 1 cross shape risk factors outperform cross yield risk factors i e yield curve level slope and convexity in explaining the market risk of yield curve dynamics 2 hedging multiple liabilities against cross shape risk delivers superior trading strategies compared to those stemming from cross yield risk management

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

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

modeling the stochastic behavior of short term interest rates pricing implications for discount bonds abstract this paper models the stochastic behavior of short term interest rates and determines the correct specification of the drift and diffusion functions of the spot rate process a wide variety of one factor diffusion and two factor stochastic volatility models is compared in terms of their ability to capture the dynamics of interest rate volatility the empirical evidence on the one three and six month eurodollar deposit rates indicates that a new class of models with stochastic volatility is better than the single factor diffusion models in forecasting the future volatility of interest rate changes the paper extends the one factor bdt term structure model to a two factor setting and presents the pricing implications for discount bonds monte carlo simulation results for the implied yields of three and six month zero coupon bonds imply that incorporating the so called level and garch effects in volatility improves the pricing performance of the interest rate models

performance evaluation of the english premier football league with data envelopment analysis this paper uses data envelopment analysis dea to evaluate the performance of english premier league football clubs from 1998 99 to 2002 03 combining sport and financial variables the paper evaluates how close the clubs are relative to the frontier of best practices analysing how they manage sport as well as financial results managerial implications of the research are devised

bond and option pricing when short rates are lognormal this article describes a one factor model for bond and option pricing that is based on the short term interest rate and that allows the target rate mean reversion and local volatility to vary deterministically through time for any horizon the distribution of possible short rates is lognormal so the rate neither falls below zero nor reflects off a barrier at zero a model like this allows one to match the yield curve the volatility curve and the cap curve surprisingly adding to future local volatility lowers the volatility curve a conventional binary tree with probabilities of 0 5 but variable time spacing is used to value bonds and options when the inputs are constant the slope of the yield curve starts out positive and ends up negative while its curvature shifts from negative to positive even when mean reversion is zero the volatility curve has a negative slope the differential cap curve rises steeply through the effects of volatility and then falls steeply through the effects of discounting and a falling forward rate used as the strike price

corrections and additions to a nonlinear equilibrium model of the term structure of interest rates abstract longstaff 1989 introduces a new process for the short rate of interest he claims to derive the zero coupon bond pricing formula and state transition density for his model we demonstrate that longstaff s pricing formula is not the solution to the pricing problem which he poses the source of his error is a failure to properly account for a boundary condition we introduce a new model economy and derive a new endogenous interest rate process and find the green s function and the price of a zero coupon bond for our model economy

modelling the term structure of interest rates an efficient nonparametric approach abstract we propose a new approach for estimating the coefficients of the term structure equation by means of the volatility of the interest rates and the slope of the yield curve one advantage of this approach consists in the fact that the drift and the market price of risk are jointly estimated and need not be individually specified we then generate trajectories in a test problem to investigate the finite properties of this approach our simulation results show that this new approach outperforms the classic nonparametric models in the literature finally an application to usa treasury bill data is also illustrated

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

an exact bond option formula this paper derives a closed form solution for european options on pure discount bonds assuming a mean reverting gaussian interest rate model as in vasicek 8 the formula is extended to european options on discount bond portfolios

immunizing default free bond portfolios with a duration vector dissatisfaction occasionally has been expressed with traditional measures of duration for immunization on conceptual grounds however more elegant duration measures have not been found to be superior to the traditional ones in empirical tests of immunization efficacy under the assumption that the term structure of continuously compounded interest rates can be expressed as a polynomial chambers and carleton 1981 demonstrate that the finite and noninstantaneous return of a default free bond can be expressed as a vector product of a duration vector and a shift vector this study derives immunization strategies from the model and tests them the results of the portfolio tests indicate that the tradi tional duration approach of macaulay provides enhanced immunization relative to matu rity approaches or naive approaches however the duration vector approach produces further improvements

chapter 11 pricing models in marketing publisher summary this chapter brings together a set of diverse efforts in the recent literature on the modeling of price decisions and related questions in marketing there has been an impressive growth in the array of topics investigated in the literature various trends in the development of pricing models are evident from the foregoing review first one trend has been to develop theoretical models to describe observed pricing strategies in the marketplace and to derive conditions under which certain strategies are optimal this trend is clearly evident when one considers the area of dynamic pricing models another trend is an attempt to develop pricing models in which certain aspects of consumer behavior e g asymmetric response to price increases versus price decreases are incorporated this development is quite recent and does offer a large potential a third dominant direction is the use of game theoretic models for developing equilibrium pricing strategies

closed form solutions for term structure derivatives with log normal interest rates we derive a unified model that gives closed form solutions for caps and floors written on interest rates as well as puts and calls written on zero coupon bonds the crucial assumption is that simple interest rates over a fixed finite period that matches the contract which we want to price are log normally distributed moreover this assumption is shown to be consistent with the heath jarrow morton model for a specific choice of volatility closed form solutions for interest rate derivatives in particular caps floors and bond options have been obtained by a number of authors for markovian term structure models with normally distributed interest rates or alternatively log normally distributed bond prices see for example jamshidian 1989 1991a heath jarrow and morton 1992 brace and musiela 1994 geman el karoui and rochet 1995 these models support black scholes type formulas most frequently used by practitioners for pricing bond options and swaptions unfortunately these models imply negative interest rates with positive probabilities and hence they are not arbitrage free in an economy with opportunities for riskless and costless storage of money briys crouhy and schobel 1991 apply the gaussian framework to derive closed form solutions for caps floors and european zero coupon bond options to exclude the influence of negative forward rates on the pricing of zero coupon bond options they introduce an additional boundary condition as shown by rady and sandmann 1994 these pricing formulas are only supported by a term structure model with an absorbing boundary for the forward rate at zero where the absorbing probability is not negligible which for a term structure model is a quite problematic assumption

recent advances in estimating term structure models in the past 10 years increasingly sophisticated statistical techniques have been applied to the estimation of increasingly complex models of the term structure of interest rates in reviewing this literature we highlight the facts that have been established and the key unresolved issues the data indicate that within a wide range of interest rates mean reversion in rates is at best weak whether mean reversion is stronger for very high or very low levels of rates is an unresolved issue the absolute volatility of rates increases as the level of rates increases but the strength of this effect and the role and nature of either stochastic volatility or regime switching components in rates are still unclear unfortunately these unresolved issues have important implications for fixed income option pricing and risk measurement including value at risk calculations

pricing interest rate derivatives a general approach the relationship between affine stochastic processes and bond pricing equations in exponential term structure models has been well established we connect this result to the pricing of interest rate derivatives if the term structure model is exponential affine then there is a linkage between the bond pricing solution and the prices of many widely traded interest rate derivative securities our results apply to m factor processes with n diffusions and l jump processes the pricing solutions require at most a single numerical integral making the model easy to implement we discuss many options that yield solutions using the methods of the article

pricing interest rate options in a two factor cox ingersoll ross model of the term structure solutions are presented for prices on interest rate options in a two factor version of the cox ingersoll ross model of the term structure specific solutions are developed for caps on floating interest rates and for european options on discount bonds coupon bonds coupon bond futures and euro dollar futures the solutions for the options are expressed as multivariate integrals and we show how to reduce the calculations to univariate numerical integrations which can be calculated very quickly the two factor model provides more flexibility in fitting observed term structures and the fixed parameters of the model can be set to capture the variability of the term structure over time article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

equilibrium positive interest rates a unified view this article develops precise connections among two general approaches to building interest rate models a general equilibrium approach using a pricing kernel and the heath jarrow and morton framework based on specifying forward rate volatilities and the market price of risk the connections exploit the observation that a pricing kernel is uniquely determined by its drift through these connections we provide for any arbitrage free term structure model a representative consumer real production economy supporting that term structure model in equilibrium we put particular emphasis on models in which interest rates remain positive by modeling the dynamics of the drift of the pricing kernel we construct a new family of markovian positive interest rate models article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the performance of alternative interest rate risk measures and immunization strategies under a heath jarrow morton framework using a monte carlo simulation this study addresses the question of how traditional risk measures and immunization strategies perform when the term structure evolves in a heath jarrow morton 1992 manner the results suggest that for immunization purposes im munization strategies and portfolio formation strategies are more important than interest rate risk measures the performance of immunization strategies depends more on the transaction costs and the holding period than on the risk measures moreover the immu nization performance of bullet and barbell portfolios is not very sensitive to interest rate risk measures

stochastic processes for interest rates and equilibrium bond prices default free bonds represent in essence money sold forward the investor gives dollars say to the government now in exchange for a contract which promises to pay with probability one a given number of dollars at maturity and possibly a stream of intermediate coupon payments prior to maturity only recently have financial economists begun to examine the pricing of those bonds in a portfolio context in that framework nominal liquidity premiums or risk premiums on long term default free bonds are attributable to uncertainty about taste technological and price level changes which may occur prior to maturity of the bonds and prior to each coupon payment if any to the extent that the investor is unable to diversify away that uncertainty there is a systematic risk attached to the marginal utility which he or she can derive from the use in consumption or investment of the dollar payoffs on the bonds in some term structure models the instantaneous or short term rate of interest denoted here as a function of time t by r t in nominal terms and r t in real terms can be taken as a sufficient statistic1 for the source of systematic uncertainty about the marginal utility of the proceeds to be derived from defaultfree bonds maturing beyond the next instant e g merton 1974 vasicek 1977 cox ingersoll and ross 1977 specific assumptions about tastes technology and utility functions lead to specific equilibrium stochastic processes for the instantaneous short term riskless rate and longer term bond prices which are modelled as functionally dependent upon maturity and that short term riskless rate if a closed form solution exists for the long term bond price as a function of maturity and the short term interest rate it will be conditional inter alia on the parameters of the stochastic process for that short term rate marsh 1981 proposed that the closed form solutions could be tested in terms of the restrictions implied cross sectionally on the parameters of the time series process for the returns or prices of longer term bonds each with a given term to maturity for an analogy outside the term structure literature think of the closed form solution given by black and scholes 1972 for the price of an option on a nondividend paying stock with lognormal price dynamics given the model the cross section of time series for the changes in prices for each of the several options written on the same stock are not unrestricted their dispersion is functionally linked to the same volatility parameter for the stock price thus the option model including

the volatility of short term interest rates an empirical comparison of alternative models of the term structure of interest rates we estimate and compare a variety of continuous time models of the short term riskless rate using the generalised method of moments we find that the most successful models in capturing the dynamics of the short term interest rate are those that allow the volatility of interest rate changes to be highly sensitive to the level of the riskless rate a number of well known models perform poorly in the comparisons because of their implicit restrictions on term structure volatility we show that these results have important implications for the use of different term structure models in valuing interest rate contingent claims and in hedging interest rate risk

effect of product line pricing characteristics on product evaluations examining the issue of product line pricing from a behavioral perspective this article reports an investigation of the relationship between the price structure of a product line and consumers evaluations of a product model within the line a 2 2 4 factorial design utilizing multiple dependent variables was conducted and replicated to test hypotheses derived from behavioral research results indicate that while the price characteristics of a product line influence consumer evaluations of a product model within the line the price characteristics do not operate independently rather they interact further the research suggests that several dependent variables that are usually considered separately in price research are actually dimensions of similar constructs

the statistical and economic role of jumps in continuous time interest rate models this paper analyzes the role of jumps in continuous time short rate models i first develop a test to detect jump induced misspecification and using treasury bill rates find evidence for the presence of jumps second i specify and estimate a nonparametric jump diffusion model results indicate that jumps play an important statistical role estimates of jump times and sizes indicate that unexpected news about the macroeconomy generates the jumps finally i investigate the pricing implications of jumps jumps generally have a minor impact on yields but they are important for pricing interest rate options

a performance assessment of the angolan soccer league abstractthis article analyses the technical efficiency of the angolan soccer league from 2008 to 2014 using a translog distance stochastic frontier model the greene stochastic frontier model presented in 2005 and kumbhakar stochastic frontier model presented in 1990 are adopted and the covariates used include luanda location funding by the oil company sonangol club supported by rich fans and club relegated during the period policy implications are then derived

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