Pricing and Hedging American Fixed-Income Derivatives with Implied Volatility Structures in the Two-Factor Heath–Jarrow–Morton Model

Ze-To, S. 2002. Pricing and Hedging American Fixed-Income Derivatives with Implied Volatility Structures in the Two-Factor Heath–Jarrow–Morton Model. Journal of Futures Markets. 22 (9), pp. 839-875. https://doi.org/10.1002/fut.10031

TitlePricing and Hedging American Fixed-Income Derivatives with Implied Volatility Structures in the Two-Factor Heath–Jarrow–Morton Model
TypeJournal article
AuthorsZe-To, S.
Abstract

Most previous empirical studies using the Heath–Jarrow–Morton model (hereafter referred to as the HJM model) have focused on the one-factor model. In contrast, this study implements the Das (1999) two-factor Poisson–Gaussian version of the HJM model that incorporates a jump component as the second-state variable. This study aims at examining the performance of the two-factor model through comparing it with the one-factor model in pricing and hedging the Eurodollar futures option.
The degree of impact arising from the jump factor also is examined. In addition, three new volatility specifications are constructed to enhance further the pricing performance of the model. Their performances are compared according to three performance yardsticks—in-sample fitting, out-of-sample pricing, and the hedging test. The result indicates that
the two-factor model outperforms the one-factor model in both the in-sample and out-sample price fitting, but the one-factor model performs better in the hedging test. In addition, the HJM model, coupled with the proposed volatility specification, leads to good fitting results that will be of considerable use to practitioners and academics in guiding
model choice for interest-rate derivatives.

KeywordsFixed Income Derivatives
Implied Volatility
Heath Jarrow Morton Model
JournalJournal of Futures Markets
Journal citation22 (9), pp. 839-875
ISSN1096-9934
Year2002
PublisherWiley
Publisher's version
Digital Object Identifier (DOI)https://doi.org/10.1002/fut.10031
Publication dates
PublishedSep 2002

Related outputs

Fundamental Index Aligned and Excess Market Return Predictability
Ze-To, S. 2022. Fundamental Index Aligned and Excess Market Return Predictability. Journal of Forecasting. 41 (3), pp. 592-614. https://doi.org/10.1002/for.2829

Option implied beta and option return
Ze-To, S. 2017. Option implied beta and option return. Applied Economics. 50 (2), pp. 128-142. https://doi.org/1080/00036846.2017.1313958

Asset liquidity and stock returns
Ze-To, S. 2016. Asset liquidity and stock returns. Advances in Accounting. 35, pp. 177-196. https://doi.org/10.1016/j.adiac.2016.08.002

Cross-Section Stock Return and Implied Covariance between Jump and Diffusive Volatility
Ze-To, S. 2015. Cross-Section Stock Return and Implied Covariance between Jump and Diffusive Volatility. Journal of Forecasting. 34 (5), pp. 379-390. https://doi.org/10.1002/for.2348

Correlated implied volatility with jump and cross section of stock returns
Ze-To, S. 2015. Correlated implied volatility with jump and cross section of stock returns. Accounting & Finance. 60 (3), pp. 2007-2037. https://doi.org/10.1111/acfi.12429

Estimating value-at-risk under a Heath––Jarrow––Morton framework with jump
Ze-To, S. 2012. Estimating value-at-risk under a Heath––Jarrow––Morton framework with jump. Applied Economics. 44 (21), pp. 2279-2741. https://doi.org/10.1080/00036846.2011.566198

Earnings management and accrual anomaly across market states and business cycles
Ze-To, S. 2012. Earnings management and accrual anomaly across market states and business cycles. Advances in Accounting. 28 (2), pp. 344-352. https://doi.org/10.1016/j.adiac.2012.09.011

Expected Stock Returns and Option-Implied Rate of Return
Ze-To, S. 2012. Expected Stock Returns and Option-Implied Rate of Return. Journal of Mathematical Finance. 2 (4), pp. 269-279. https://doi.org/10.4236/jmf.2012.24030

Crisis, Value at Risk and Conditional Extreme Value Theory via the NIG + Jump Model
Ze-To, S. 2012. Crisis, Value at Risk and Conditional Extreme Value Theory via the NIG + Jump Model. Journal of Mathematical Finance. 2 (3), pp. 225-237. https://doi.org/10.4236/jmf.2012.23025

Crisis, Value at Risk, and Conditional Extreme Value Theory via Garch-Jump Model
Ze-To, S. 2010. Crisis, Value at Risk, and Conditional Extreme Value Theory via Garch-Jump Model. Review of Futures Markets. 18 (4), pp. 319-345.

Value at Risk and Conditional Extreme Value Theory via Markov Regime Switching Models
Ze-To, S. 2008. Value at Risk and Conditional Extreme Value Theory via Markov Regime Switching Models. Journal of Futures Markets. 28 (2), pp. 155-181. https://doi.org/10.1002/fut.20293

Permalink - https://westminsterresearch.westminster.ac.uk/item/w0v2z/pricing-and-hedging-american-fixed-income-derivatives-with-implied-volatility-structures-in-the-two-factor-heath-jarrow-morton-model


Share this

Usage statistics

23 total views
18 total downloads
These values cover views and downloads from WestminsterResearch and are for the period from September 2nd 2018, when this repository was created.