Related papers: Option-Implied Zero-Coupon Yields: Unifying Bond a…
We investigate the joint description of the interest-rate term stuctures of Italy and an AAA-rated European country by mean of a --here proposed-- correlated CIR-like bivariate model where one of the state variables is interpreted as a…
As decentralized money market protocols continue to grow in value locked, there have been a number of optimizations proposed for improving capital efficiency. One set of proposals from Euler Finance and Mars Protocol is to have an interest…
This paper quantifies the effects of equity tail risk on the US government bond market. We estimate equity tail risk with option-implied stock market volatility that stems from large negative price jumps, and we assess its value in…
This paper studies the application of machine learning in extracting the market implied features from historical risk neutral corporate bond yields. We consider the example of a hypothetical illiquid fixed income market. After choosing a…
This paper investigates the impact of Trade Policy Uncertainty (TPU) on stock-bond correlation dynamics in the United States. Using daily data on major U.S. stock indices and the 10-year Treasury bond from 2015 to 2025, we estimate…
This paper presents an axiomatic scheme for interest rate models in discrete time. We take a pricing kernel approach, which builds in the arbitrage-free property and provides a link to equilibrium economics. We require that the pricing…
We derive a closed-form formula for computing bond prices between coupon payments. Our results cover both the `Treasury' and the `Street' pricing methods used by sovereign and corporate issuers. We apply our formulas to two UK gilts, the 8%…
We analyze analytic approximation formulae for pricing zero-coupon bonds in the case when the short-term interest rate is driven by a one-factor mean-reverting process with a volatility nonlinearly depending on the interest rate itself. We…
We propose a modification of the classical Black-Derman-Toy (BDT) interest rate tree model, which includes the possibility of a jump with small probability at each step to a practically zero interest rate. The corresponding BDT algorithms…
In an incomplete market, including liquidly-traded European options in an investment portfolio could potentially improve the expected terminal utility for a risk-averse investor. However, unlike the Sharpe ratio, which provides a concise…
In this paper we introduce a class of information-based models for the pricing of fixed-income securities. We consider a set of continuous- time information processes that describe the flow of information about market factors in a monetary…
In the third part of this series we introduce consistent relative value measures for CDS-Bond basis trades using the bond-implied CDS term structure derived from fitted survival rate curves. We explain why this measure is better than the…
We revisit the problem of pricing and hedging plain vanilla single-currency interest rate derivatives using multiple distinct yield curves for market coherent estimation of discount factors and forward rates with different underlying rate…
Interest-rate risk is a key factor for property-casualty insurer capital. P&C companies tend to be highly leveraged, with bond holdings much greater than capital. For GAAP capital, bonds are marked to market but liabilities are not, so…
A pricing formula for discount bonds, based on the consideration of the market perception of future liquidity risk, is established. An information-based model for liquidity is then introduced, which is used to obtain an expression for the…
Option prices encode the market's collective outlook through implied density and implied volatility. An explicit link between implied density and implied volatility translates the risk-neutrality of the former into conditions on the latter…
No-arbitrage models of term structure have the feature that the return on zero-coupon bonds is the sum of the short rate and the product of volatility and market price of risk. Well known models restrict the behavior of the market price of…
In 'A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options', Heston proposes a Stochastic Volatility (SV) model with constant interest rate and derives a semi-explicit valuation formula.…
In this note, we develop stock option price approximations for a model which takes both the risk o default and the stochastic volatility into account. We also let the intensity of defaults be influenced by the volatility. We show that it…
The market practice of extrapolating different term structures from different instruments lacks a rigorous justification in terms of cash flows structure and market observables. In this paper, we integrate our previous consistent theory for…