Pricing Treasury Inflation Protected Securities and Related Derivatives using an HJM Model

Robert Jarrow () and Yildiray Yildirim

Chapter 16 in Financial Derivatives Pricing:Selected Works of Robert Jarrow, 2008, pp 349-370 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper uses an HJM model to price TIPS and related derivative securities. First, using the market prices of TIPS and ordinary U.S. Treasury securities, both the real and nominal zero-coupon bond price curves are obtained using standard coupon bond price stripping procedures. Next, a three-factor arbitrage-free term structure model is fit to the time-series evolutions of the CPI-U and the real and nominal zero-coupon bond price curves. Then, using these estimated term structure parameters, the validity of the HJM model for pricing TIPS is confirmed via its hedging performance. Lastly the usefulness of the pricing model is illustrated by valuing call options on the inflation index.

Keywords: Derivatives; Options; Hedging; HJM; Black–Scholes; Forwards; Futures; Martingale Measure; Calls; Puts; Market Manipulation; Margin Requirements (search for similar items in EconPapers)
Date: 2008
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Journal Article: Pricing Treasury Inflation Protected Securities and Related Derivatives using an HJM Model (2003)
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