Term structure movements implicit in Asian option prices

Caio Almeida, José Vicente

Research output: Contribution to journalArticle

4 Scopus citations

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 languageEnglish (US)
Pages (from-to)119-134
Number of pages16
JournalQuantitative Finance
Volume12
Issue number1
DOIs
StatePublished - Jan 2012
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics, Econometrics and Finance(all)

Keywords

  • Affine term structure models
  • Asset pricing
  • Empirical finance
  • Financial econometrics
  • Fixed income derivatives

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