IDEAS home Printed from https://ideas.repec.org/a/eee/phsmap/v388y2009i13p2666-2681.html
   My bibliography  Save this article

Empirical analysis of quantum finance interest rates models

Author

Listed:
  • Baaquie, Belal E.
  • Yang, Cao

Abstract

Empirical forward interest rates drive the debt markets. Libor and Euribor futures data is used to calibrate and test models of interest rates based on the formulation of quantum finance. In particular, all the model parameters, including interest rate volatilities, are obtained from market data. The random noise driving the forward interest rates is taken to be a Euclidean two dimension quantum field. We analyze two models, namely the bond forward interest rates, which is a linear theory and the Libor Market Model, which is a nonlinear theory. Both the models are analyzed using Libor and Euribor data, with various approximations to match the linear and nonlinear models. The results are quite good, with the linear model having an accuracy of about 99% and the nonlinear model being slightly less accurate. We extend our analysis by directly using the Zero Coupon Yield Curve (ZCYC) data for Libor and for bonds; but due to some technical difficulties we could not derive the models parameters directly from the ZCYC data.

Suggested Citation

  • Baaquie, Belal E. & Yang, Cao, 2009. "Empirical analysis of quantum finance interest rates models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(13), pages 2666-2681.
    • Handle: RePEc:eee:phsmap:v:388:y:2009:i:13:p:2666-2681
    DOI: 10.1016/j.physa.2009.02.044
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378437109001484
    Download Restriction: Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000
    File URL: https://libkey.io/10.1016/j.physa.2009.02.044?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Farshid Jamshidian, 1997. "LIBOR and swap market models and measures (*)," Finance and Stochastics, Springer, vol. 1(4), pages 293-330.
    2. Frank De Jong & Joost Driessen & Antoon Pelsser, 2001. "Libor Market Models versus Swap Market Models for Pricing Interest Rate Derivatives: An Empirical Analysis," Review of Finance, European Finance Association, vol. 5(3), pages 201-237.
    3. Leif Andersen & Jesper Andreasen, 2000. "Volatility skews and extensions of the Libor market model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 7(1), pages 1-32.
    4. de Jong, F.C.J.M. & Driessen, J.J.A.G. & Pelsser, A., 2000. "Libor and Swap Market Models for the Pricing of Interest Rate Derivatives : An Empirical Analysis," Other publications TiSEM 1fc274a2-9ac0-4d04-9386-7, Tilburg University, School of Economics and Management.
    5. Jean-Philippe Bouchaud & Nicolas Sagna & Rama Cont & Nicole El-Karoui & Marc Potters, 1999. "Phenomenology of the interest rate curve," Applied Mathematical Finance, Taylor & Francis Journals, vol. 6(3), pages 209-232.
    6. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    7. Andrew Matacz & Jean-Philippe Bouchaud, 2000. "Explaining The Forward Interest Rate Term Structure," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 381-389.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pan Tang & Belal E. Baaquie & Xin Du & Ying Zhang, 2016. "Linearized Hamiltonian of the LIBOR market model: analytical and empirical results," Applied Economics, Taylor & Francis Journals, vol. 48(10), pages 878-891, February.
    2. Baaquie, Belal E. & Cao, Yang, 2014. "Option volatility and the acceleration Lagrangian," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 393(C), pages 337-363.
    3. Lee, Sangwook & Kim, Min Jae & Lee, Sun Young & Kim, Soo Yong & Ban, Joon Hwa, 2013. "The effect of the subprime crisis on the credit risk in global scale," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(9), pages 2060-2071.
    4. Baaquie, Belal E., 2010. "Interest rates in quantum finance: Caps, swaptions and bond options," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(2), pages 296-314.
    5. Ashtiani, Mehrdad & Azgomi, Mohammad Abdollahi, 2015. "A survey of quantum-like approaches to decision making and cognition," Mathematical Social Sciences, Elsevier, vol. 75(C), pages 49-80.
    6. Baaquie, Belal E. & Du, Xin & Tang, Pan & Cao, Yang, 2014. "Pricing of range accrual swap in the quantum finance Libor Market Model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 401(C), pages 182-200.
    7. Baaquie, Belal E. & Tang, Pan, 2012. "Simulation of nonlinear interest rates in quantum finance: Libor Market Model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(4), pages 1287-1308.
    8. Haoran Zheng & Bo Dong, 2024. "Quantum Temporal Winds: Turbulence in Financial Markets," Mathematics, MDPI, vol. 12(10), pages 1-28, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Giuseppe Arbia & Michele Di Marcantonio, 2015. "Forecasting Interest Rates Using Geostatistical Techniques," Econometrics, MDPI, vol. 3(4), pages 1-28, November.
    2. Christiansen, Charlotte & Strunk Hansen, Charlotte, 2000. "Implied Volatility of Interest Rate Options: An Empirical Investigation of the Market Model," Finance Working Papers 00-1, University of Aarhus, Aarhus School of Business, Department of Business Studies.
    3. Zühlsdorff, Christian, 2002. "Extended Libor Market Models with Affine and Quadratic Volatility," Bonn Econ Discussion Papers 6/2002, University of Bonn, Bonn Graduate School of Economics (BGSE).
    4. Eckhard Platen, 2005. "An Alternative Interest Rate Term Structure Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(06), pages 717-735.
    5. Paul Glasserman & S. G. Kou, 2003. "The Term Structure of Simple Forward Rates with Jump Risk," Mathematical Finance, Wiley Blackwell, vol. 13(3), pages 383-410, July.
    6. Carol Alexander & Dimitri Lvov, 2003. "Statistical Properties of Forward Libor Rates," ICMA Centre Discussion Papers in Finance icma-dp2003-03, Henley Business School, University of Reading.
    7. Tiziana Di Matteo & Tomaso Aste, 2002. "How Does The Eurodollar Interest Rate Behave?," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(01), pages 107-122.
    8. Fergusson, Kevin, 2020. "Less-Expensive Valuation And Reserving Of Long-Dated Variable Annuities When Interest Rates And Mortality Rates Are Stochastic," ASTIN Bulletin, Cambridge University Press, vol. 50(2), pages 381-417, May.
    9. Baaquie, Belal E. & Tang, Pan, 2012. "Simulation of nonlinear interest rates in quantum finance: Libor Market Model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(4), pages 1287-1308.
    10. repec:uts:finphd:40 is not listed on IDEAS
    11. S. Galluccio & J.‐M. Ly & Z. Huang & O. Scaillet, 2007. "Theory And Calibration Of Swap Market Models," Mathematical Finance, Wiley Blackwell, vol. 17(1), pages 111-141, January.
    12. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    13. Zhanyu Chen & Kai Zhang & Hongbiao Zhao, 2022. "A Skellam market model for loan prime rate options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(3), pages 525-551, March.
    14. Jaka Gogala & Joanne E. Kennedy, 2017. "CLASSIFICATION OF TWO- AND THREE-FACTOR TIME-HOMOGENEOUS SEPARABLE LMMs," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(02), pages 1-44, March.
    15. Shane Miller, 2007. "Pricing of Contingent Claims Under the Real-World Measure," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2007, January-A.
    16. Dariusz Gatarek & Juliusz Jabłecki, 2021. "Between Scylla and Charybdis: The Bermudan Swaptions Pricing Odyssey," Mathematics, MDPI, vol. 9(2), pages 1-32, January.
    17. Kevin John Fergusson, 2018. "Less-Expensive Pricing and Hedging of Extreme-Maturity Interest Rate Derivatives and Equity Index Options Under the Real-World Measure," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 3-2018, January-A.
    18. Nicolas Merener & Paul Glasserman, 2003. "Numerical solution of jump-diffusion LIBOR market models," Finance and Stochastics, Springer, vol. 7(1), pages 1-27.
    19. Shane Miller, 2007. "Pricing of Contingent Claims Under the Real-World Measure," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 25, July-Dece.
    20. Svenstrup, Mikkel, 2005. "On the suboptimality of single-factor exercise strategies for Bermudan swaptions," Journal of Financial Economics, Elsevier, vol. 78(3), pages 651-684, December.
    21. Mireille Bossy & Rajna Gibson & Francois-Serge Lhabitant & Nathalie Pistre & Denis Talay, 2006. "Model misspecification analysis for bond options and Markovian hedging strategies," Review of Derivatives Research, Springer, vol. 9(2), pages 109-135, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:388:y:2009:i:13:p:2666-2681. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.