A critical review of techniques for Term Structure analysis

By adopting the polynomial interpolation method, we propose an approach to hedge against the interest-rate risk of the default-free bonds by measuring the nonparallel movement of the yield-curve, such as the translation, the rotation and the twist. The empirical analysis shows that our hedging strategies are comparable to traditional duration-convexity strategy, or even better when we have more suitable hedging instruments on hand. The article shows that this strategy is flex...

The aim of this thesis is to analyze and renovate few main-stream models on inflation derivatives. In the first chapter of the thesis, concepts of financial instruments and fundamental terms are introduced, such as coupon bond, inflation-indexed bond, swap. In the second chapter of the thesis, classic models along the history of developing quantified interest rate models are introduced and analyzed. Moreover, the classification of interest rate models is introduced to help ...

In this paper, the relevance of the Feller conditions in discrete time macro-finance term structure models is investigated. The Feller conditions are usually imposed on a continuous time multivariate square root process to ensure that the roots have nonnegative arguments. For a discrete time approximate model, the Feller conditions do not give this guarantee. Moreover, in a macro-finance context the restrictions imposed might be economically unappealing. At the same time, it ...

We propose a model which can be jointly calibrated to the corporate bond term structure and equity option volatility surface of the same company. Our purpose is to obtain explicit bond and equity option pricing formulas that can be calibrated to find a risk neutral model that matches a set of observed market prices. This risk neutral model can then be used to price more exotic, illiquid or over-the-counter derivatives. We observe that the model implied credit default swap (CD...

In this paper, we establish a market model for the term structure of forward inflation rates based on the risk-neutral dynamics of nominal and real zero-coupon bonds. Under the market model, we can price inflation caplets as well as inflation swaptions with a formula similar to the Black's formula, thus justify the current market practice. We demonstrate how to further extend the market model to cope with volatility smiles. Moreover, we establish a consistency condition on th...

This article contains the lecture notes for the short course ``Introduction to Econophysics,'' delivered at the II Brazilian School on Statistical Mechanics, held in Sao Carlos, Brazil, in February 2004. The main goal of the present notes is twofold: i) to provide a brief introduction to the problem of pricing financial derivatives in continuous time; and ii) to review some of the related problems to which physicists have made relevant contributions in recent years.

Yield curve forecasting is an important problem in finance. In this work we explore the use of Gaussian Processes in conjunction with a dynamic modeling strategy, much like the Kalman Filter, to model the yield curve. Gaussian Processes have been successfully applied to model functional data in a variety of applications. A Gaussian Process is used to model the yield curve. The hyper-parameters of the Gaussian Process model are updated as the algorithm receives yield curve dat...

In the present paper we show that the Binomial-tree approach for pricing, hedging, and risk assessment of Convertible bonds in the framework of the Tsiveriotis-Fernandes model has serious drawbacks. Key words: Convertible bonds, Binomial tree, Tsiveriotis-Fernandes model, Convertible bond pricing, Convertible bond Greeks, Convertible Arbitrage, Delta-hedging of Convertible bonds, Risk Assessment of Convertible bonds.

We address the so-called calibration problem which consists of fitting in a tractable way a given model to a specified term structure like, e.g., yield or default probability curves. Time-homogeneous jump-diffusions like Vasicek or Cox-Ingersoll-Ross (possibly coupled with compounded Poisson jumps, JCIR), are tractable processes but have limited flexibility; they fail to replicate actual market curves. The deterministic shift extension of the latter (Hull-White or JCIR++) is ...

In this article, we review the construction and properties of some popular approaches to modeling LIBOR rates. We discuss the following frameworks: classical LIBOR market models, forward price models and Markov-functional models. We close with the recently developed affine LIBOR models.