IDEAS home Printed from https://ideas.repec.org/p/fip/fedcwp/9714.html
   My bibliography  Save this paper

Interest rate option pricing with volatility humps

Author

Listed:
  • Iyuan Chuang
  • Peter H. Ritchken

Abstract

A development of a simple model in which interest rate claims are priced in the Heath-Jarrow-Morton paradigm and so incorporate full information on the term structure. The volatility structure for forward rates is humped and includes as a special case the exponentially dampened volatility structure used in the generalized Vasicek model.

Suggested Citation

  • Iyuan Chuang & Peter H. Ritchken, 1997. "Interest rate option pricing with volatility humps," Working Papers (Old Series) 9714, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:9714
    DOI: 10.26509/frbc-wp-199714
    as

    Download full text from publisher

    File URL: https://doi.org/10.26509/frbc-wp-199714
    File Function: Persistent link
    Download Restriction: no
    File URL: https://libkey.io/10.26509/frbc-wp-199714?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
    ---><---

    References listed on IDEAS

    as
    1. R. Bhar & C. Chiarella, 1997. "Transformation of Heath?Jarrow?Morton models to Markovian systems," The European Journal of Finance, Taylor & Francis Journals, vol. 3(1), pages 1-26, March.
    2. Ho, Thomas S Y & Lee, Sang-bin, 1986. "Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-1029, December.
    3. 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..
    Full references (including those not matched with items on IDEAS)

    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. Bjork, Tomas, 2009. "Arbitrage Theory in Continuous Time," OUP Catalogue, Oxford University Press, edition 3, number 9780199574742.
    2. Chiarella, Carl & Clewlow, Les & Musti, Silvana, 2005. "A volatility decomposition control variate technique for Monte Carlo simulations of Heath Jarrow Morton models," European Journal of Operational Research, Elsevier, vol. 161(2), pages 325-336, March.
    3. Carl Chiarella & Oh-Kang Kwon, 2001. "State Variables and the Affine Nature of Markovian HJM Term Structure Models," Research Paper Series 52, Quantitative Finance Research Centre, University of Technology, Sydney.
    4. Camilla Landén & Tomas Björk, 2002. "On the construction of finite dimensional realizations for nonlinear forward rate models," Finance and Stochastics, Springer, vol. 6(3), pages 303-331.
    5. 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.
    6. Ingo Beyna, 2013. "The Cheyette Model Class," Lecture Notes in Economics and Mathematical Systems, in: Interest Rate Derivatives, edition 127, chapter 0, pages 3-15, Springer.
    7. Gibson, Rajna & Lhabitant, Francois-Serge & Talay, Denis, 2010. "Modeling the Term Structure of Interest Rates: A Review of the Literature," Foundations and Trends(R) in Finance, now publishers, vol. 5(1–2), pages 1-156, December.
    8. Ram Bhar & Carl Chiarella, 1996. "Construction of Zero-Coupon Yield Curve From Coupon Bond Yield Using Australian Data," Working Paper Series 70, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    9. Anders B. Trolle & Eduardo S. Schwartz, 2009. "A General Stochastic Volatility Model for the Pricing of Interest Rate Derivatives," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 2007-2057, May.
    10. Massimo Costabile & Ivar Massabó & Emilio Russo, 2013. "A Path-Independent Humped Volatility Model for Option Pricing," Applied Mathematical Finance, Taylor & Francis Journals, vol. 20(3), pages 191-210, July.
    11. Ram Bhar & Carl Chiarella & Thuy-Duong To, 2004. "Estimating the Volatility Structure of an Arbitrage-Free Interest Rate Model Via the Futures Markets," Finance 0409003, University Library of Munich, Germany.
    12. Ram Bhar & Carl Chiarella, 2000. "Approximating Heath-Jarrow-Morton Non-Markovian Term Structure of Interest Rate Models with Markovian Systems," Working Paper Series 76, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    13. Ingo Beyna, 2013. "Interest Rate Derivatives," Lecture Notes in Economics and Mathematical Systems, Springer, edition 127, number 978-3-642-34925-6, July.
    14. Björk, Tomas, 2003. "On the Geometry of Interest Rate Models," SSE/EFI Working Paper Series in Economics and Finance 545, Stockholm School of Economics.
    15. Carl Chiarella & Xue-Zhong He & Christina Sklibosios Nikitopoulos, 2015. "Derivative Security Pricing," Dynamic Modeling and Econometrics in Economics and Finance, Springer, edition 127, number 978-3-662-45906-5, March.
    16. Peter Ritchken & Iyuan Chuang, 2000. "Interest rate option pricing with volatility humps," Review of Derivatives Research, Springer, vol. 3(3), pages 237-262, October.
    17. Carl Chiarella & Oh Kwon, 2003. "Finite Dimensional Affine Realisations of HJM Models in Terms of Forward Rates and Yields," Review of Derivatives Research, Springer, vol. 6(2), pages 129-155, May.
    18. Ramaprasad Bhar, 2010. "Stochastic Filtering with Applications in Finance," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7736, September.
    19. Junwu Gan, 2005. "Analytic Backward Induction Of Option Cash Flows: A New Application Paradigm For The Markovian Interest Rate Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(08), pages 1019-1057.
    20. Ingo Beyna & Carl Chiarella & Boda Kang, 2012. "Pricing Interest Rate Derivatives in a Multifactor HJM Model with Time," Research Paper Series 317, Quantitative Finance Research Centre, University of Technology, Sydney.

    More about this item

    Keywords

    Interest rates; options;

    Statistics

    Access and download statistics

    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:fip:fedcwp:9714. 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: 4D Library (email available below). General contact details of provider: https://edirc.repec.org/data/frbclus.html .

    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.