A Term Structure Model for Dividends and Interest Rates

Damir Filipović and Sander Willems
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Damir Filipović: Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute
Sander Willems: Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute

No 17-52, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Over the last decade, dividends have become a standalone asset class instead of a mere side product of an equity investment. We introduce a framework based on polynomial jump-diffusions to jointly price the term structures of dividends and interest rates. Prices for dividend futures, bonds, and the dividend paying stock are given in closed form. We present an efficient moment based approximation method for option pricing. In a calibration exercise we show that a parsimonious model specification has a good fit with Euribor interest rate swaps and swaptions, Euro Stoxx 50 index dividend futures and dividend futures options, and Euro Stoxx 50 index options.

Keywords: Dividend derivatives; interest rates; polynomial jump-diffusion; term structure; moment-based option pricing (search for similar items in EconPapers)
JEL-codes: C32 G12 G13 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2017-08
New Economics Papers: this item is included in nep-cfn and nep-mac
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1752

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