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Simulation of interest rate options using ARCH

Carlo Bianchi (), Giorgio Calzolari and Frederic P. Sterbenz

MPRA Paper from University Library of Munich, Germany

Abstract: The autoregressive conditional heteroskedasticity (ARCH) estimation procedure provides a specification of the error terms as well as estimates of the coefficients. A simple interest rate equation is estimated using least squares and also using ARCH. Then the stochastic simulation methodology is extended to the ARCH process and Treasury Bond call options are evaluated. Interestingly when ARCH is compared to least squares it is found that the difference in coefficients estimates has a small effect, while the different simulation procedures have a large effect on the value of Treasury Bond call options.

Keywords: ARCH model; simulation; interest rate; Treasury bond call options (search for similar items in EconPapers)
JEL-codes: C63 C22 (search for similar items in EconPapers)
Date: 1991
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Published in Universita' di Messina, Istituto di Economia, Statistica e Analisi del Territorio Quaderno No. 10, presented at the European Meeting of the Econometric Society, Cambridge, U.K. (1991): pp. 1-28

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