Download or read book Affine Models of Currency Pricing written by Backus David and published by . This book was released on 2009 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: Perhaps the most puzzling feature of currency prices is the tendency for high interest rate currencies to appreciate when the expectations hypothesis suggests the reverse. Some have attributed this forward premium anomaly to a time-varying risk premium but theory has been largely unsuccessful in producing a risk premium with the requisite properties. We characterize the risk premium in a general arbitrage-free setting and describe the features a theory must have to account for the anomaly. In affine models the anomaly requires either that state variables have asymmetric effects on state prices in different currencies or that we abandon the common requirement that interest rates be strictly positive.
Download or read book Affine Models of Currency Pricing written by David Backus and published by . This book was released on 1996 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: Perhaps the most puzzling feature of currency prices is the tendency for high interest rate currencies to appreciate, when the expectations hypothesis suggests the reverse. Some have attributed this forward premium anomaly to a time-varying risk premium, but theory has been largely unsuccessful in producing a risk premium with the requisite properties. We characterize the risk premium in a general arbitrage-free setting and describe the features a theory must have to account for the anomaly. In affine models, the anomaly requires either that state variables have asymmetric effects on state prices in different currencies or that we abandon the common requirement that interest rates be strictly positive.
Download or read book Arbitrage Free Affine Models of the Forward Price of Foreign Currency written by J. Benson Durham and published by . This book was released on 2014 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: Forward foreign exchange contracts embed not only expected depreciation but also a sizable premium, which complicates inferences about anticipated returns. This study derives arbitrage-free affine forward currency models (AFCMs) with closed-form expressions for both unobservable variables. Model calibration to forward term structures of eleven U.S.-dollar currency pairs from the mid-to-late 1990s through early 2014 fits the data closely and suggests that the premium is indeed nonzero and variable, but not to the degree implied by previous econometric studies.
Download or read book Pricing and Hedging in Affine Models with Possibility of Default and Characteristic Functions of Log Stock Prices written by Alexander Wugalter and published by . This book was released on 2011 with total page 168 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book An Affine Multi Currency Model with Stochastic Volatility and Stochastic Interest Rates written by Alessandro Gnoatto and published by . This book was released on 2014 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: We introduce a tractable multi-currency model with stochastic volatility and correlated stochastic interest rates that takes into account the smile in the FX market and the evolution of yield curves. The pricing of vanilla options on FX rates can be performed efficiently through the FFT methodology thanks to the affinity of the model. A joint calibration exercise of the implied volatility surfaces of a triangle of FX rates shows the flexibility of our framework in dealing with the typical symmetries that characterize the FX market. Our framework is also able to describe many non trivial links between FX rates and interest rates: a second calibration exercise highlights the ability of the model to fi t simultaneously FX implied volatilities while being coherent with interest rate products.
Download or read book Affine Modeling of the Joint Dynamics of Exchange Rates and Interest Rates written by Bing Han and published by . This book was released on 2002 with total page 180 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Quadratic Term Structure Models with Jumps in Incomplete Currency Markets written by and published by . This book was released on 2004 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a multi-currency quadratic term structure model that allows for several sources of market incompleteness. A new feature of the model is the jump-quadratic dynamics of the exchange rates that simultaneously generate greater flexibility in the time-varying risk premium and excessive currency volatility. Our model empirically outperforms the complete market quadratic and affine multi-currency diffusion models. It accounts for the forward premium anomaly with reasonable market price of risks. The market incompleteness consists of idiosyncratic diffusion-like innovations and jump discontinuities. We find that the jumps dominate the variations in the currency returns and produce most of the excessive currency volatility.
Download or read book Handbook of Financial Engineering written by Constantin Zopounidis and published by Springer Science & Business Media. This book was released on 2010-07-25 with total page 494 pages. Available in PDF, EPUB and Kindle. Book excerpt: This comprehensive handbook discusses the most recent advances within the field of financial engineering, focusing not only on the description of the existing areas in financial engineering research, but also on the new methodologies that have been developed for modeling and addressing financial engineering problems. The book is intended for financial engineers, researchers, applied mathematicians, and graduate students interested in real-world applications to financial engineering.
Download or read book Handbook of the Economics of Finance written by G. Constantinides and published by Elsevier. This book was released on 2003-11-04 with total page 698 pages. Available in PDF, EPUB and Kindle. Book excerpt: Volume 1B covers the economics of financial markets: the saving and investment decisions; the valuation of equities, derivatives, and fixed income securities; and market microstructure.
Download or read book Monetary Policy Rules and the Term Structure of Interest Rates written by Shu Wu and published by . This book was released on 2000 with total page 208 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Transform Analysis and Asset Pricing for Affine Jump diffusions written by Darrell Duffie and published by . This book was released on 1999 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the setting of affine' jump-diffusion state processes, this paper provides an analytical treatment of a class of transforms, including various Laplace and Fourier transforms as special cases, that allow an analytical treatment of a range of valuation and econometric problems. Example applications include fixed-income pricing models, with a role for intensityy-based models of default, as well as a wide range of option-pricing applications. An illustrative example examines the implications of stochastic volatility and jumps for option valuation. This example highlights the impact on option 'smirks' of the joint distribution of jumps in volatility and jumps in the underlying asset price, through both amplitude as well as jump timing.
Download or read book Modeling a Two currency Affine Arbitrage free Nelson Siegel Term Structure Model written by Yi Yu and published by . This book was released on 2012 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Pricing Interest Rate Derivatives with Piecewise Multilinear Interpolations and Transition Parameters written by Hatem Ben Ameur and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We present a general and flexible numerical procedure for pricing European interest-rate derivatives within multifactor affine term structure models by means of piecewise multilinear interpolations. Our procedure relies to the maximum extent on the true density of the state process and solves the pricing problem in quasi-closed form. Then, we show how to generalize our approach for pricing American-style options. As an illustration, we price European interest-rate swaptions and Eurodollar futures options, which cannot be analytically evaluated. We use nine affine models and show that our approach converges rapidly and competes well against Monte Carlo simulation. We also demonstrate that our approach remains well-behaved for pricing deeply out-of-the money interest-rate derivatives.
Download or read book Yield Forecasts and Stochastic Volatility in Affine Models with Macro Factors written by Hwagyun Kim and published by . This book was released on 2011 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: Affine term structure models (ATSMs) are known to have a trade-off in predicting future Treasury yields and fitting the time-varying volatility of interest rates. This paper empirically studies the role of macroeconomic variables in simultaneously achieving these two goals under affine models. To this end, we incorporate a liquidity demand theory via a measure of the velocity of money into affine models. We find that this considerably reduces the statistical tension between matching the first and second moments of interest rates. In terms of forecasting yields, the models with the velocity of money outperform among the ATSMs examined, including those with inflation and real activity. Our result is robust across maturities, forecasting horizons, risk price specifications, and the number of latent factors.
Download or read book Properties of foreign exchange risk premiums written by Lucio Sarno and published by . This book was released on 2011 with total page 85 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Term Structure Dynamics with Macroeconomic Factors written by Ha-Il Park and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Affine term structure models (ATSMs) are known to have a trade-off in predicting future Treasury yields and fitting the time-varying volatility of interest rates. First, I empirically study the role of macroeconomic variables in simultaneously achieving these two goals under affine models. To this end, I incorporate a liquidity demand theory via a measure of the velocity of money into affine models. I find that this considerably reduces the statistical tension between matching the first and second moments of interest rates. In terms of forecasting yields, the models with the velocity of money outperform among the ATSMs examined, including those with inflation and real activity. My result is robust across maturities, forecasting horizons, risk price specifications, and the number of latent factors. Next, I incorporate latent macro factors and the spread factor between the short-term Treasury yield and the federal funds rate into an affine term structure model by imposing cross-equation restrictions from no-arbitrage using daily data. In doing so, I identify the highfrequency monetary policy rule that describes the central bank's reaction to expected inflation and real activity at daily frequency. I find that my affine model with macro factors and the spread factor shows better forecasting performance.
Download or read book Modeling the Term Structure of Interest Rates written by Rajna Gibson and published by Now Publishers Inc. This book was released on 2010 with total page 171 pages. Available in PDF, EPUB and Kindle. Book excerpt: Modeling the Term Structure of Interest Rates provides a comprehensive review of the continuous-time modeling techniques of the term structure applicable to value and hedge default-free bonds and other interest rate derivatives.
