Abstract
In this paper we implement dynamic term structure models that adopt bonds and Asian options in the estimation process. The goal is to analyse the pricing and hedging implications of term structure movements when options are (or are not) included in the estimation process. We investigate how options affect the shape, risk premium and hedging structure of the dynamic factors. We find that the inclusion of options affects the loadings of the slope and curvature factors, and considerably changes the risk premium and hedging structure of all dynamic factors.
Original language | English (US) |
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Pages (from-to) | 119-134 |
Number of pages | 16 |
Journal | Quantitative Finance |
Volume | 12 |
Issue number | 1 |
DOIs | |
State | Published - Jan 2012 |
Externally published | Yes |
All Science Journal Classification (ASJC) codes
- General Economics, Econometrics and Finance
- Finance
Keywords
- Affine term structure models
- Asset pricing
- Empirical finance
- Financial econometrics
- Fixed income derivatives