[go: up one dir, main page]

IDEAS home Printed from https://ideas.repec.org/a/eee/jfinec/v62y2001i1p39-66.html
   My bibliography  Save this article

Throwing away a billion dollars: the cost of suboptimal exercise strategies in the swaptions market

Author

Listed:
  • Longstaff, Francis A.
  • Santa-Clara, Pedro
  • Schwartz, Eduardo S.
Abstract
No abstract is available for this item.

Suggested Citation

  • Longstaff, Francis A. & Santa-Clara, Pedro & Schwartz, Eduardo S., 2001. "Throwing away a billion dollars: the cost of suboptimal exercise strategies in the swaptions market," Journal of Financial Economics, Elsevier, vol. 62(1), pages 39-66, October.
  • Handle: RePEc:eee:jfinec:v:62:y:2001:i:1:p:39-66
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304-405X(01)00073-3
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Farshid Jamshidian, 1997. "LIBOR and swap market models and measures (*)," Finance and Stochastics, Springer, vol. 1(4), pages 293-330.
    2. Longstaff, Francis A, 2001. "Optimal Portfolio Choice and the Valuation of Illiquid Securities," The Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 407-431.
    3. Santa-Clara, Pedro & Sornette, Didier, 2001. "The Dynamics of the Forward Interest Rate Curve with Stochastic String Shocks," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 149-185.
    4. Driessen, J.J.A.G. & Klaassen, P. & Melenberg, B., 2000. "The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions," Other publications TiSEM f96eb284-4de9-48c3-8371-8, Tilburg University, School of Economics and Management.
    5. Gibbons, Michael R & Ramaswamy, Krishna, 1993. "A Test of the Cox, Ingersoll, and Ross Model of the Term Structure," The Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 619-658.
    6. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. "Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-2049, December.
    7. Backus, David & Foresi, Silverio & Zin, Stanley, 1998. "Arbitrage Opportunities in Arbitrage-Free Models of Bond Pricing," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(1), pages 13-26, January.
    8. Liu, Jun & Longstaff, Francis A. & Mandell, Ravit E., 2000. "The Market Price of Credit Risk: An Empirical Analysis of Interest Rate Swap Spreads," University of California at Los Angeles, Anderson Graduate School of Management qt0zw4f9w6, Anderson Graduate School of Management, UCLA.
    9. Driessen, Joost & Klaassen, Pieter & Melenberg, Bertrand, 2003. "The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(3), pages 635-672, September.
    10. T. Clifton Green & Stephen Figlewski, 1999. "Market Risk and Model Risk for a Financial Institution Writing Options," Journal of Finance, American Finance Association, vol. 54(4), pages 1465-1499, August.
    11. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    12. D. P. Kennedy, 1994. "The Term Structure Of Interest Rates As A Gaussian Random Field," Mathematical Finance, Wiley Blackwell, vol. 4(3), pages 247-258, July.
    13. Gupta, Anurag & Subrahmanyam, Marti G., 2000. "An empirical examination of the convexity bias in the pricing of interest rate swaps," Journal of Financial Economics, Elsevier, vol. 55(2), pages 239-279, February.
    14. Duffie, Darrell & Singleton, Kenneth J, 1997. "An Econometric Model of the Term Structure of Interest-Rate Swap Yields," Journal of Finance, American Finance Association, vol. 52(4), pages 1287-1321, September.
    15. Philip H. Dybvig, 1988. "Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market," The Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 67-88.
    16. Brenner, Robin J. & Harjes, Richard H. & Kroner, Kenneth F., 1996. "Another Look at Models of the Short-Term Interest Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(1), pages 85-107, March.
    17. Peter Carr & Guang Yang, 2001. "Simulating Bermudan Interest Rate Derivatives," World Scientific Book Chapters, in: Marco Avellaneda (ed.), Quantitative Analysis In Financial Markets Collected Papers of the New York University Mathematical Finance Seminar(Volume II), chapter 11, pages 295-316, World Scientific Publishing Co. Pte. Ltd..
    18. Clifford A. Ball & Walter N. Torous, 1999. "The Stochastic Volatility of Short‐Term Interest Rates: Some International Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 2339-2359, December.
    19. Litzenberger, Robert H, 1992. "Swaps: Plain and Fanciful," Journal of Finance, American Finance Association, vol. 47(3), pages 831-850, July.
    20. Knez, Peter J & Litterman, Robert & Scheinkman, Jose Alexandre, 1994. "Explorations into Factors Explaining Money Market Returns," Journal of Finance, American Finance Association, vol. 49(5), pages 1861-1882, December.
    21. Alan Brace & Dariusz G¸atarek & Marek Musiela, 1997. "The Market Model of Interest Rate Dynamics," Mathematical Finance, Wiley Blackwell, vol. 7(2), pages 127-155, April.
    22. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 55(5), pages 1943-1978, October.
    23. Chan, K C, et al, 1992. "An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-1227, July.
    24. Goldstein, Robert S, 2000. "The Term Structure of Interest Rates as a Random Field," The Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 365-384.
    25. Pearson, Neil D & Sun, Tong-Sheng, 1994. "Exploiting the Conditional Density in Estimating the Term Structure: An Application to the Cox, Ingersoll, and Ross Model," Journal of Finance, American Finance Association, vol. 49(4), pages 1279-1304, September.
    26. Sandra Peterson & Richard C. Stapleton & Marti G. Subrahmanyam, 1999. "The Valuation of American-Style Swaptions in a Two-factor Spot-Futures Model," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-078, New York University, Leonard N. Stern School of Business-.
    27. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
    28. repec:bla:jfinan:v:53:y:1998:i:6:p:2059-2106 is not listed on IDEAS
    29. Andersen, Torben G. & Lund, Jesper, 1997. "Estimating continuous-time stochastic volatility models of the short-term interest rate," Journal of Econometrics, Elsevier, vol. 77(2), pages 343-377, April.
    30. Kees G. Koedijk & François G. J. A. Nissen & Peter C. Schotman & Christian C. P. Wolff, 1997. "The Dynamics of Short-Term Interest Rate Volatility Reconsidered," Review of Finance, European Finance Association, vol. 1(1), pages 105-130.
    31. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
    32. Sun, Tong-sheng & Sundaresan, Suresh & Wang, Ching, 1993. "Interest rate swaps: An empirical investigation," Journal of Financial Economics, Elsevier, vol. 34(1), pages 77-99, August.
    33. Brown, Stephen J & Dybvig, Philip H, 1986. "The Empirical Implications of the Cox, Ingersoll, Ross Theory of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 41(3), pages 617-630, July.
    34. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
    35. Stambaugh, Robert F., 1988. "The information in forward rates : Implications for models of the term structure," Journal of Financial Economics, Elsevier, vol. 21(1), pages 41-70, May.
    36. Francis A. Longstaff & Pedro Santa‐Clara & Eduardo S. Schwartz, 2001. "The Relative Valuation of Caps and Swaptions: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 56(6), pages 2067-2109, December.
    37. D. P. Kennedy, 1997. "Characterizing Gaussian Models of the Term Structure of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 7(2), pages 107-118, April.
    38. Bicksler, James & Chen, Andrew H, 1986. "An Economic Analysis of Interest Rate Swaps," Journal of Finance, American Finance Association, vol. 41(3), pages 645-655, July.
    39. Longstaff, Francis A & Schwartz, Eduardo S, 1992. "Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model," Journal of Finance, American Finance Association, vol. 47(4), pages 1259-1282, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Longstaff, Francis A & Santa-Clara, Pedro & Schwartz, Eduardo S, 2000. "The Relative Valuation of Caps and Swaptions: Theory and Empirical Evidence," University of California at Los Angeles, Anderson Graduate School of Management qt65f1914p, Anderson Graduate School of Management, UCLA.
    2. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    3. repec:wyi:journl:002109 is not listed on IDEAS
    4. Qiang Dai & Kenneth Singleton, 2003. "Term Structure Dynamics in Theory and Reality," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 631-678, July.
    5. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    6. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    7. Pierre Collin‐Dufresne & Robert S. Goldstein, 2002. "Do Bonds Span the Fixed Income Markets? Theory and Evidence for Unspanned Stochastic Volatility," Journal of Finance, American Finance Association, vol. 57(4), pages 1685-1730, August.
    8. Dai, Qiang & Singleton, Kenneth J., 2003. "Fixed-income pricing," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 20, pages 1207-1246, Elsevier.
    9. Heidari, Massoud & Wu, Liuren, 2009. "A Joint Framework for Consistently Pricing Interest Rates and Interest Rate Derivatives," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(3), pages 517-550, June.
    10. Robert Jarrow & Haitao Li & Feng Zhao, 2007. "Interest Rate Caps “Smile” Too! But Can the LIBOR Market Models Capture the Smile?," Journal of Finance, American Finance Association, vol. 62(1), pages 345-382, February.
    11. Casassus, Jaime & Collin-Dufresne, Pierre & Goldstein, Bob, 2005. "Unspanned stochastic volatility and fixed income derivatives pricing," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2723-2749, November.
    12. Driessen, Joost & Klaassen, Pieter & Melenberg, Bertrand, 2003. "The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(3), pages 635-672, September.
    13. Buraschi, Andrea & Corielli, Francesco, 2005. "Risk management implications of time-inconsistency: Model updating and recalibration of no-arbitrage models," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2883-2907, November.
    14. Massoud Heidari & Liuren Wu, 2002. "Term Structure of Interest Rates, Yield Curve Residuals, and the Consistent Pricing of Interest Rates and Interest Rate Derivatives," Finance 0207010, University Library of Munich, Germany, revised 10 Sep 2002.
    15. Bueno-Guerrero, Alberto & Moreno, Manuel & Navas, Javier F., 2020. "Valuation of caps and swaptions under a stochastic string model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 559(C).
    16. Robert A. Jarrow, 2009. "The Term Structure of Interest Rates," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 69-96, November.
    17. Jin-Chuan Duan & Kris Jacobs, 2001. "Short and Long Memory in Equilibrium Interest Rate Dynamics," CIRANO Working Papers 2001s-22, CIRANO.
    18. Zongwu Cai & Yongmiao Hong, 2013. "Some Recent Developments in Nonparametric Finance," Working Papers 2013-10-14, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    19. Gibson, Rajna & Lhabitant, Francois-Serge & Talay, Denis, 2010. "Modeling the Term Structure of Interest Rates: A Review of the Literature," Foundations and Trends(R) in Finance, now publishers, vol. 5(1–2), pages 1-156, December.
    20. Anders B. Trolle & Eduardo S. Schwartz, 2009. "A General Stochastic Volatility Model for the Pricing of Interest Rate Derivatives," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 2007-2057, May.
    21. V. Cvsa & P. Ritchken, 2001. "Pricing Claims Under GARCH-Level Dependent Interest Rate Processes," Management Science, INFORMS, vol. 47(12), pages 1693-1711, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:62:y:2001:i:1:p:39-66. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.