Term Structure of Interest Rates, Yield Curve Residuals, and the ConsIstent Pricing of Interest Rates and Interest Rate Derivatives
- Topics:
- Investment and Capital Markets
- Tags:
- Finance,
- Financial Planning,
- Financial Services,
- Interest Rate,
- Interest Rate Derivative,
- Pricing Strategy
- Source:
- Fordham University
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Overview: Dynamic term structure models (DTSMs) price interest rate derivatives based on the model implied fair values of the yield curve, ignoring any pricing residuals on the yield curve that are either from model approximations or market imperfections. This paper proposes a new framework that consistently prices both interest rates and interest rate derivatives. In particular, under such a framework, instead of making a priori assumptions, we allow the data on interest rates and interest rate derivatives to dictate the dynamics of the yield curve residuals, as well as their impact on the pricing of interest rate derivatives.
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Format: PDF | Size: 243KB | Date: Sep 2002 | Pages: 38
