IDEALS Home University of Illinois at Urbana-Champaign logo The Alma Mater The Main Quad

Default-free bond futures and options on default-free bond futures: Theoretical and empirical investigation

Show full item record

Bookmark or cite this item: http://hdl.handle.net/2142/21496

Files in this item

File Description Format
PDF 9114270.pdf (5MB) Restricted to U of Illinois (no description provided) PDF
Title: Default-free bond futures and options on default-free bond futures: Theoretical and empirical investigation
Author(s): Hsin, Chin-Wen
Doctoral Committee Chair(s): Bera, Anil K.
Department / Program: Finance
Discipline: Finance
Degree Granting Institution: University of Illinois at Urbana-Champaign
Degree: Ph.D.
Genre: Dissertation
Subject(s): Economics, Finance
Abstract: This study investigates the pricing behaviors of default-free bond futures and American options on default-free bond futures based on the framework of Brennan and Schwartz (1979). In their model, the state space of interest-rate-dependent claims is spanned by the instantaneous spot interest rate and the long-term consol rate. This design is chosen to incorporate the features of interest-rate-dependent claims and to avoid inconsistencies in other pricing models for general assets. This study assumes that the logarithm of these two factors follow a linear transformation of an Ornstein-Uhlenbeck process. The prices of these contingent claims are solutions to a set of partial different equations subject to proper boundary conditions. As there is no closed form solutions to these equations, a finite-difference method, line-hopscotch method, is employed.To implement the pricing model, one has to empirically estimate (i) the parameters in the interest rate processes and (ii) the risk premium parameter associated with the short spot rate. An exact discrete time model is derived such that one can use discrete time empirical data to estimate parameters in the continuous interest rate processes. Maximum likelihood estimation results show that the parameter estimates are affected by the choice of proxy variable, sample period and the size of sampling interval. It is most obvious fort those parameters in the short rate process.The model prices of default-free bonds, default-free bond futures and options on default-free bond futures are solved successively by the numerical method. The empirical results indicate insignificant pricing errors for Treasury bond futures. However, the model does not perform well for pricing options on T-bond futures. A sensitivity analysis is conducted. It suggests that the long rate process is important in determining the pricing behavior of these claims. Also, the long rate affects the security prices differently than the short rate does.
Issue Date: 1990
Type: Text
Language: English
URI: http://hdl.handle.net/2142/21496
Rights Information: Copyright 1990 Hsin, Chin-Wen
Date Available in IDEALS: 2011-05-07
Identifier in Online Catalog: AAI9114270
OCLC Identifier: (UMI)AAI9114270
 

This item appears in the following Collection(s)

Show full item record

Item Statistics

  • Total Downloads: 0
  • Downloads this Month: 0
  • Downloads Today: 0

Browse

My Account

Information

Access Key