Hedging in The Possible Presence of Unspanned Stochastic Volatility : Evidence From Swaption Markets  

Oleh:

Ritchken, Peter H. ; Gupta, Anurag ; Rong, Fan

Jenis: Article from Journal - ilmiah internasional
Dalam koleksi: The Journal of Finance (EBSCO) vol. 58 no. 5 (Oct. 2003), page 2219-2248.
Topik: EVIDENCE; interest rates; bond markets; derivatives; stochastic models; volatility
Fulltext: p 2219.pdf (404.59KB)

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Perpustakaan Pusat (Semanggi) Nomor Panggil: JJ88 Non-tandon: 1 (dapat dipinjam: 0) Tandon: tidak ada

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This paper examines whether higher order multifactor models, with state variables linked solely to underlying LIBOR - swap rates, are by themselves capable of explaining and hedging interest rate derivatives, or whether models explicitly exhibiting features such as unspanned stochastic volatility are necessary. Our research shows that swaptions and even swaption straddles can be well hedged with LIBOR bonds alone. We examine the potential benefits of looking outside the LIBOR market for factors that might impact swaption prices without impacting swap rates, and find them to be minor, indicating that the swaption market is well integrated with the LIBOR - swap market.

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