EconPapers    
Economics at your fingertips  
 

Identifying volatility risk premia from fixed income Asian options

Caio Almeida () and José Valentim Vicente

Journal of Banking & Finance, 2009, vol. 33, issue 4, 652-661

Abstract: Fixed income options are frequently adopted by companies to hedge interest rate risk. Their payoff dependence on the cumulative short-term rate makes them particularly informative about interest rate volatility risk. Based on a joint dataset of bonds and Asian interest rate options, we study the interrelations between bond and volatility risk premia in a major emerging fixed income market. We propose a dynamic term structure model that generates an incomplete market compatible with a preliminary empirical analysis of the dataset. Approximation formulas for at-the-money Asian option prices avoid the use of computationally intensive Fourier transform methods, allowing for an efficient implementation of the model. The model generates a bond risk premium strongly correlated with a widely accepted emerging market benchmark index (EMBI-Global), and a negative volatility risk premium, consistent with the use of Asian options as insurance in this market.

Keywords: Asian; options; Risk; premium; Stochastic; volatility; Incomplete; markets (search for similar items in EconPapers)
Date: 2009
References: Add references at CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378-4266(08)00284-7
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Identifying Volatility Risk Premium from Fixed Income Asian Options (2007) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:4:p:652-661

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2024-12-28
Handle: RePEc:eee:jbfina:v:33:y:2009:i:4:p:652-661