Download or read book Arbitrage Opportunities in Arbitrage free Models of Bond Pricing written by David Backus and published by . This book was released on 1996 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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. The popular Black-Derman-Toy model, for example, overprices call options on long bonds relative to those on short bonds when interest rates exhibit mean reversion. We argue, more generally, 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 non-normal interest rate distributions
Download or read book Arbitrage Opportunities in Arbitrage Free Models of Bond Pricing written by David K. Backus and published by . This book was released on 2008 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: We explore the practitioners methodology of choosing time-dependent parameters to fit a bond model to selected asset prices, and show that it can lead to systematic mispricing of some assets. The Black-Derman-Toy model, for example, is likely to overprice call options on long bonds when interest rates exhibit mean reversion. This mispricing can be exploited, even when no other traders offer the mispriced assets. We argue more generally that time-dependent parameters cannot substitute for sound fundamentals.
Download or read book Arbitrage Opportunities in Artibrage free Models of Bond Pricing written by David Backus and published by . This book was released on 1994 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Arbitrage free models of bond pricing written by David Backus and published by . This book was released on 1996 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Bond Pricing and Yield Curve Modeling written by Riccardo Rebonato and published by . This book was released on 2018-06-07 with total page 781 pages. Available in PDF, EPUB and Kindle. Book excerpt: Rebonato provides an authoritative, clear, and up-to-date explanation of the cutting-edge innovations in affine modeling for government bonds, and provides readers with the precise tools to develop their own models. This book combines precise theory with up-to-date empirical evidence to build, with the minimum mathematical sophistication required for the task, a critical understanding of what drives the government bond market.
Download or read book Arbitrage Free Bond Pricing with Dynamic Macroeconomic Models written by Michael F. Gallmeyer and published by . This book was released on 2010 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the relationship between monetary-policy-induced changes in short interest rates and yields on long-maturity default-free bonds. The volatility of the long end of the term structure and its relationship with monetary policy are puzzling from the perspective of simple structural macroeconomic models. We explore whether richer models of risk premiums, specifically stochastic volatility models combined with Epstein-Zin recursive utility, can account for such patterns. We study the properties of the yield curve when inflation is an exogenous process and compare this to the yield curve when inflation is endogenous and determined through an interest-rate/Taylor rule. When inflation is exogenous, it is difficult to match the shape of the historical average yield curve. Capturing its upward slope is especially difficult as the nominal pricing kernel with exogenous inflation does not exhibit any negative autocorrelation - a necessary condition for an upward sloping yield curve as shown in Backus and Zin (1994). Endogenizing inflation provides a substantially better fit of the historical yield curve as the Taylor rule provides additional flexibility in introducing negative autocorrelation into the nominal pricing kernel. Additionally, endogenous inflation provides for a flatter term structure of yield volatilities which better fits historical bond data.
Download or read book Fixed Income Arbitrage written by M. Anthony Wong and published by John Wiley & Sons. This book was released on 1993-08-30 with total page 288 pages. Available in PDF, EPUB and Kindle. Book excerpt: An exposition to the world of relative-value trading in the fixed-income markets written by a leading-edge thinker and scientific analyst of global financial markets. Using concrete examples, he details profit opportunities--treasury bills, bonds, notes, interest-rate futures and options--explaining how to obtain virtually risk-free rewards if the proper knowledge and skills are applied. Discusses the critical success factors of relative-value trading and highlights the important role of technology, capital requirements and considerations in order to set up a fixed-income arbitrage system.
Download or read book A Simple Binomial No arbitrage Model of the Term Structure written by Thomas J. O'Brien and published by . This book was released on 1991 with total page 80 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Market Consistent Prices written by Pablo Koch-Medina and published by Springer Nature. This book was released on 2020-07-16 with total page 448 pages. Available in PDF, EPUB and Kindle. Book excerpt: Arbitrage Theory provides the foundation for the pricing of financial derivatives and has become indispensable in both financial theory and financial practice. This textbook offers a rigorous and comprehensive introduction to the mathematics of arbitrage pricing in a discrete-time, finite-state economy in which a finite number of securities are traded. In a first step, various versions of the Fundamental Theorem of Asset Pricing, i.e., characterizations of when a market does not admit arbitrage opportunities, are proved. The book then focuses on incomplete markets where the main concern is to obtain a precise description of the set of “market-consistent” prices for nontraded financial contracts, i.e. the set of prices at which such contracts could be transacted between rational agents. Both European-type and American-type contracts are considered. A distinguishing feature of this book is its emphasis on market-consistent prices and a systematic description of pricing rules, also at intermediate dates. The benefits of this approach are most evident in the treatment of American options, which is novel in terms of both the presentation and the scope, while also presenting new results. The focus on discrete-time, finite-state models makes it possible to cover all relevant topics while requiring only a moderate mathematical background on the part of the reader. The book will appeal to mathematical finance and financial economics students seeking an elementary but rigorous introduction to the subject; mathematics and physics students looking for an opportunity to get acquainted with a modern applied topic; and mathematicians, physicists and quantitatively inclined economists working or planning to work in the financial industry.
Download or read book The Unique Arbitrage free Affine Bond Pricing Model written by Chen Guo and published by . This book was released on 2006 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Term Structure of Interest Rates written by David Meiselman and published by . This book was released on 1962 with total page 96 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Term Structure of Interest Rates and Arbitrage Free Bond Pricing written by Recai Gunesdogdu and published by . This book was released on 1998 with total page 140 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Arbitrage with Fixed Costs and Interest Rate Models written by Elyes Jouini and published by . This book was released on 2015 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we study securities market models with fixed costs. We characterize the absence of arbitrage opportunities and we provide fair pricing rules. We then apply these results to extend some popular interest rate and option pricing models, which present arbitrage opportunities in the absence of fixed costs.In particular, we prove that the quite striking result obtained by Dybvig, Ingersoll and Ross (1996), which asserts that, under the assumption of absence of arbitrage, long zero-coupon rates can never fall, is no longer true in models with fixed costs, even arbitrarily small ones. For instance, models where the long-term rate follows a diffusion process are arbitrage-free in the presence of fixed costs (including arbitrarily small ones). We also rationalize models with partially absorbing or reflecting barriers on the price processes. In particular, we propose a version of the Cox, Ingersoll, and Ross (1985) model which, as in Longstaff (1992), produces yield curves with realistic humps but does not assume an absorbing barrier for the short-term rate. This is made possible by the presence of (even arbitrarily small) fixed costs.
Download or read book The Arbitrage Pricing Theory as an Approach to Capital Asset Valuation written by Christian Koch and published by GRIN Verlag. This book was released on 2009-03 with total page 81 pages. Available in PDF, EPUB and Kindle. Book excerpt: Diploma Thesis from the year 1996 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,3, European Business School - International University Schlo Reichartshausen Oestrich-Winkel, 160 entries in the bibliography, language: English, abstract: A "few surprises" could be the trivial answer of the Arbitrage Pricing Theory if asked for the major determinants of stock returns. The APT was developed as a traceable framework of the main principles of capital asset pricing in financial markets. It investigates the causes underlying one of the most important fields in financial economics, namely the relationship between risk and return. The APT provides a thorough understanding of the nature and origins of risk inherent in financial assets and how capital markets reward an investor for bearing risk. Its fundamental intuition is the absence of arbitrage which is, indeed, central to finance and which has been used in virtually all areas of financial study. Since its introduction two decades ago, the APT has been subject to extensive theoretical as well as empirical research. By now, the arbitrage theory is well established in both respects and has enlightened our perception of capital markets. This paper aims to present the APT as an appropriate instrument of capital asset pricing and to link its principles to the valuation of risky income streams. The objective is also to provide an overview of the state of art of APT in the context of alternative capital market theories. For this purpose, Section 2 describes the basic concepts of the traditional asset pricing model, the CAPM, and indicates differences to arbitrage theory. Section 3 constitutes the main part of this paper introducing a derivation of the APT. Emphasis is laid on principles rather than on rigorous proof. The intuition of the pricing formula and its consistency with the state space preference theory are discussed. Important contributions to the APT are classified and br
Download or read book Arbitrage Free Prices Versus Equilibrium Prices written by Robert A. Jarrow and published by . This book was released on 1981 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Risk Neutral Valuation written by Nicholas H. Bingham and published by Springer Science & Business Media. This book was released on 2013-06-29 with total page 306 pages. Available in PDF, EPUB and Kindle. Book excerpt: With a simple approach accessible to a wide audience, this book aims for the heart of mathematical finance: the fundamental formula of arbitrage pricing theory. This method of pricing discounts everything and takes expected values under the equivalent martingale measure. The authors approach is simple and excludes unnecessary proofs of measure-theoretic probability, instead, it favors techniques and examples of proven interest to financial practitioners.
Download or read book Arbitrage Free Pricing of Interest Rate Contingent Claims written by Bjorn Flesaker and published by . This book was released on 1990 with total page 246 pages. Available in PDF, EPUB and Kindle. Book excerpt:
