Pricing of Bond Options: Unspanned Stochastic Volatility and Random Field Models

✍ Scribed by Dr. Detlef Repplinger (auth.)

• Publisher: Springer-Verlag Berlin Heidelberg
• Year: 2008
• Tongue: English
• Leaves: 141
• Series: Lecture Notes in Economics and Mathematical Systems 615
• Edition: 1
• Category: Library

✦ Synopsis

RWT Award 2008!

For his excellent monograph, Detlef Repplinger won the RWT Reutlinger Wirtschaftstreuhand GMBH award in June 2008.

A major theme of this book is the development of a consistent unified model framework for the evaluation of bond options. In general options on zero bonds (e.g. caps) and options on coupon bearing bonds (e.g. swaptions) are linked by no-arbitrage relations through the correlation structure of interest rates. Therefore, unspanned stochastic volatility (USV) as well as Random Field (RF) models are used to model the dynamics of entire yield curves. The USV models postulate a correlation between the bond price dynamics and the subordinated stochastic volatility process, whereas Random Field models allow for a deterministic correlation structure between bond prices of different terms. Then the pricing of bond options is done either by running a Fractional Fourier Transform or by applying the Integrated Edgeworth Expansion approach. The latter is a new extension of a generalized series expansion of the (log) characteristic function, especially adapted for the computation of exercise probabilities.

✦ Table of Contents

Front Matter....Pages i-x
Introduction....Pages 1-5
The option pricing framework....Pages 7-13
The Edgeworth Expansion....Pages 15-28
The Integrated Edgeworth Expansion....Pages 29-38
Multi-Factor HJM models....Pages 39-69
Multiple-Random Fields term structure models....Pages 71-92
Multi-factor USV term structure model....Pages 93-112
Conclusions....Pages 113-116
Appendix....Pages 117-123
Matlab codes for the EE and IEE....Pages 125-130
Back Matter....Pages 131-137

✦ Subjects

Finance /Banking; Financial Economics; Quantitative Finance