scholarly journals - Long-Term Spread Option Valuation and Hedging

Commodities ◽  
2015 ◽  
pp. 106-129
Keyword(s):  
Option Valuation ◽  
Term Spread ◽  
Spread Option

scholarly journals Long term spread option valuation and hedging

2008 ◽  
Vol 32 (12) ◽  
pp. 2530-2540 ◽  
Author(s):  
M.A.H. Dempster ◽  
Elena Medova ◽  
Ke Tang
Keyword(s):  
Option Valuation ◽  
Term Spread ◽  
Spread Option

scholarly journals The term structure of interest rates and inflation forecast targeting

2011 ◽  
Vol 12 (2) ◽  
pp. 162-179
Author(s):  
Eric Schaling ◽  
Willem Verhagen ◽  
Sylvester Eiffinger
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Term Structure ◽  
Inflation Targeting ◽  
Nominal Interest Rate ◽  
Term Spread ◽  
State Of The Economy ◽  
Output Persistence

This paper examines the implications of the expectations theory of the term structure of interest rates for the implementation of inflation targeting. We show that the responsiveness of the central bank’s instrument to the underlying state of the economy is increasing in the duration of the long-term bond.  On the other hand, an increase in duration will make long-term inflationary expectations - and therefore also the long-term nominal interest rate - less responsive to the state of the economy. The extent to which the central bank is concerned with output stabilisation will exert a moderating influence on the central bank’s response to leading indicators of future inflation. However, the effect of an increase in this parameter on the long-term nominal interest rate turns out to be ambiguous. Next, we show that both the sensitivity of the nominal term spread to economic fundamentals and the extent to which the spread predicts future output, are increasing in the duration of the long bond and the degree of structural output persistence. However, if the central bank becomes relatively less concerned about inflation stabilisation the term spread will be less successful in predicting real economic activity.

Term spread regressions of the rational expectations hypothesis of the term structure allowing for risk premium effects

2015 ◽  
Vol 19 (1) ◽  
Author(s):  
Efthymios Argyropoulos ◽  
Elias Tzavalis
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Rational Expectations ◽  
Time Varying ◽  
Structure Model ◽  
Expectations Hypothesis ◽  
Term Structure Model ◽  
Term Spread ◽  
Term Premium

AbstractThis paper suggests a new empirical methodology of testing the predictions of the term spread between long and short-term interest rates about future changes of the former allowing for term premium effects, according to the rational expectations hypothesis of the term structure. To capture the effects of a time-varying term premium on the term spread, the paper relies on an empirically attractive affine Gaussian dynamic term structure model which assumes that the term structure of interest rates is spanned by three unobserved state variables. To retrieve accurate values of these variables from interest rates series, the paper suggests a new method which can overcome the effects of measurement (or pricing) errors inherent in these series on the estimates of the model. This method is assessed by a Monte Carlo study. Ignoring these errors will lead to biased estimates of term structure models. The empirical results of the paper provide support for the suggested term structure model. They show that this model can efficiently capture the time-varying term premium effects embodied in long-term interest rates, which can explain the failures of term spread to forecast future changes in long-term rates.

Forecasting Volatility Using Long Memory and Comovements: An Application to Option Valuation under SFAS 123R

2010 ◽  
Vol 45 (2) ◽  
pp. 503-533 ◽  
Author(s):  
George J. Jiang ◽  
Yisong S. Tian
Keyword(s):  
Long Memory ◽  
Financial Accounting ◽  
Option Valuation ◽  
Volatility Model ◽  
Forecasting Performance ◽  
Market Factors ◽  
Performance Forecasting ◽  
Long Term Forecasting ◽  
Forecasting Volatility

AbstractHorizon-matched historical volatility is commonly used to forecast future volatility for option valuation under the Statement of Financial Accounting Standards (SFAS) 123R. In this paper, we empirically investigate the performance of using historical volatility to forecast long-term stock return volatility in comparison with a number of alternative forecasting methods. In analyzing forecasting errors and their impact on reported income due to option expensing, we find that historical volatility is a poor forecast for long-term volatility and that shrinkage adjustment toward comparable-firm volatility only slightly improves its performance. Forecasting performance can be improved substantially by incorporating both long memory and comovements with common market factors. We also experiment with a simple mixed-horizon realized volatility model and find its long-term forecasting performance to be more accurate than historical forecasts but less accurate than long-memory forecasts.

Foreign official holdings of US treasuries, stock effect and the economy: a DSGE approach

2018 ◽  
Vol 20 (1) ◽  
Author(s):  
John Nana Francois
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Demand Curve ◽  
Feedback Mechanism ◽  
Empirical Literature ◽  
Term Spread ◽  
Short And Long Term ◽  
Stock Effect

Abstract This paper examines the effects of shocks to foreign official holdings of long-term U.S. Treasuries (FOHL) on macroeconomic aggregates using a dynamic general equilibrium model. The model treats short- and long-term bonds as imperfect substitutes through endogenous portfolio adjustment frictions. This provides a channel for changes in relative supply of assests to influence asset prices. Three key findings emerge: (1) positive shocks to FOHL impact the long-term interest rate and the term spread negatively through a stock effect channel – defined as persistent changes in interest rates as a result of movement along the Treasury demand curve. This result is consistent with findings in the empirical literature. (2) Through a feedback mechanism from an endogenous term structure in the model, the decline in the long-term interest rate induces an expansion in economic activity which leads to an increase in consumption, output and inflation. Both the stock effect and the feedback mechanism are generated by the portfolio frictions. (3) Higher degrees of persistence of FOHL shocks or imperfect asset substitution generate a prolonged negative stock effect following shocks to FOHL. This causes a longer delay of the term spread to return to its steady state after it falls; hence, inducing an extended and stronger stimulative feedback effect from the endogenous term structure into the modeled economy.  These findings help explain macroeconomic events such as the so-called ``Greenspan conundrum'' of the mid 2000s.

scholarly journals Closed Form Spread Option Valuation

2006 ◽  
Author(s):  
Petter Bjerksund ◽  
Gunnar Stensland
Keyword(s):  
Closed Form ◽  
Option Valuation ◽  
Spread Option

scholarly journals The construction of zonal models of dispersion in channels via matched centre manifolds

1996 ◽  
Vol 38 (1) ◽  
pp. 101-125 ◽  
Author(s):  
S. D. Watt ◽  
A. J. Roberts
Keyword(s):  
Original Problem ◽  
Centre Manifold ◽  
Term Spread ◽  
Wide Range ◽  
Centre Manifolds ◽  
Zonal Models ◽  
Principle Of Matching ◽  
Multi Mode ◽  
Modelling Problems

AbstractTaylor's model of dispersion simply describes the long-term spread of material along a pipe, channel or river. However, often we need multi-mode models to resolve finer details in space and time. Here we construct zonal models of dispersion via the new principle of matching their long-term evolution with that of the original problem. Using centre manifold techniques this is done straightforwardly and systematically. Furthermore, this approach provides correct initial and boundary conditions for the zonal models. We expect the proposed principle of matched centre manifold evolution to be useful in a wide range of modelling problems.

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