MODELS OF INTEREST RATES, INTEREST-RATE SENSITIVE INSTRUMENTS, AND THE PRICING OF BONDS: THEORY AND TESTS

Mondher Bellalah
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Mondher Bellalah: Université de Cergy-Pontoise, France

Chapter 16 in Derivatives, Risk Management & Value, 2009, pp 703-741 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe following sections are included:Chapter OutlineIntroductionInterest Rates and Interest-Rate Sensitive InstrumentsZero-coupon bondsTerm structure of interest ratesForward interest ratesShort-term interest rateCoupon-bearing bondsYield-to-Maturity (YTM)Market conventionsInterest Rates and the Pricing of BondsThe instantaneous interest rates under certaintyThe instantaneous interest rate under uncertaintyInterest Rate Processes and the Pricing of Bonds and OptionsThe Vasicek modelThe Brennan and Schwartz modelThe CIR modelThe Ho and Lee modelThe HJM modelThe BDT modelThe Hull and White modelFong and Vasicek modelLongstaff and Schwartz modelThe Relative Merits of the Competing ModelsA Comparative Analysis of Term Structure Estimation ModelsThe construction of the term structure and coupon bondsFitting functions and estimation procedureTerm Premium Estimates From Zero-Coupon Bonds: New Evidence on the Expectations HypothesisDistributional Properties of Spot and Forward Interest Rates: USD, DEM, GBP, and JPYInterest rate levelsInterest rate differences and log differencesSummaryAppendix A: An Application of Interest Rate Models to Account for Information Costs: An ExerciseAn application of the HJM model in the presence of information costsThe forward rate equationThe spot rate processThe market price of riskRelationship between risk-neutral forward rate drift and volatilityPricing derivativesAn application of the Ho and Lee model in the presence of information costAppendix B: Implementation of the BDT Model with Different Volatility EstimatorsThe BDT modelEstimation resultsQuestionsReferences

Keywords: Options; Forwards; Futures; Valuation; Hedging; Arbitrage; Speculation; Pricing (search for similar items in EconPapers)
Date: 2009
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