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Spanned stochastic volatility in bond markets : a reexamination of the relative pricing between bonds and bond options
Kim, Don H. (Author)

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Abstract
This paper reexamines the issue of unspanned stochastic volatility (USV) in bond markets and the puzzle of poor relative pricing between bonds and bond options. I make a distinction between the "weak USV" and the "strong USV" scenarios, and analyze the evidence for each of them. I argue that the poor bonds/options relative pricing in the extant literature is not necessarily evidence for the strong USV scenario, and show that a maximally flexible 2-factor quadratic-Gaussian model (a non-USV model) estimated without bond options data can capture much of the movement in bond option prices. Dropping the positive-definiteness requirement for nominal interest rates and adopting "regularized" estimations turn out to be important for obtaining sensible results.

Language:English
Keywords:finančni trg, trg kapitala, obveznice, opcije, oblikovanje cene, obrestna mera, izvedeni finančni instrumenti, financial market, capital market, bonds, options, pricing, interest rate, derivatives
Work type:Not categorized (r6)
Organization:EF - Faculty of Economics
Year:2007
Publisher:Bank for International Settlements
Number of pages:38 str.
Place:Basel (Switzerland)
UDC:336.76
COBISS.SI-ID:17777894 Link is opened in a new window
Views:494
Downloads:151
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