Online from: 1975
Subject Area: Accounting and Finance
Options: To add Favourites and Table of Contents Alerts please take a Emerald profile
|Title:||Pricing interest rate derivatives under stochastic volatility|
|Author(s):||Nabil Tahani, (School of Administrative Studies, Faculty of Liberal Arts and Professional Studies, York University, Toronto, Canada), Xiaofei Li, (School of Administrative Studies, Faculty of Liberal Arts and Professional Studies, York University, Toronto, Canada)|
|Citation:||Nabil Tahani, Xiaofei Li, (2011) "Pricing interest rate derivatives under stochastic volatility", Managerial Finance, Vol. 37 Iss: 1, pp.72 - 91|
|Keywords:||Derivative markets, Interest rates, Numerical analysis, Series, Stochastic processes|
|Article type:||Research paper|
|DOI:||10.1108/03074351111092157 (Permanent URL)|
|Publisher:||Emerald Group Publishing Limited|
Purpose – The purpose of this paper is to derive semi-closed-form solutions to a wide variety of interest rate derivatives prices under stochastic volatility in affine-term structure models.
Design/methodology/approach – The paper first derives the Frobenius series solution to the cross-moment generating function, and then inverts the related characteristic function using the Gauss-Laguerre quadrature rule for the corresponding cumulative probabilities.
Findings – This paper values options on discount bonds, coupon bond options, swaptions, interest rate caps, floors, and collars, etc. The valuation approach suggested in this paper is found to be both accurate and fast and the approach compares favorably with some alternative methods in the literature.
Research limitations/implications – Future research could extend the approach adopted in this paper to some non-affine-term structure models such as quadratic models.
Practical implications – The valuation approach in this study can be used to price mortgage-backed securities, asset-backed securities and credit default swaps. The approach can also be used to value derivatives on other assets such as commodities. Finally, the approach in this paper is useful for the risk management of fixed-income portfolios.
Originality/value – This paper utilizes a new approach to value many of the most commonly traded interest rate derivatives in a stochastic volatility framework.
To purchase this item please login or register.
Complete and print this form to request this document from your librarian