Efficient Trees for CIR and CEV Short Rate Models

Nawalkha, Sanjay K.; Beliaeva, Natalia A.

doi:10.3905/jai.2007.688995

Cited by 18 publications

(4 citation statements)

References 34 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…We choose = 6% as in [21]. We use the method of calculating the price or hedge (in a liquid environment) of options in the CEV model from [19]. The accurate estimation of and other similar parameters can be found in [4].…”

Section: Numerical Resultsmentioning

confidence: 99%

Option pricing in a CEV model with liquidity costs

Turek

2016

Appl. Math. (Warsaw)

View full text Add to dashboard Cite

The goal of this paper is to make an attempt to generalise the model of pricing European options with an illiquid underlying asset considered by Rogers and Singh (2010). We assume that an investor's decisions have only a temporary effect on the price, which is proportional to the square of the change of the number of asset units in the investor's portfolio. We also assume that the underlying asset price follows a CEV model. To prove existence and uniqueness of the solution, we use techniques similar to fixed point theorems and Feynman-Kac representation. Asymptotic behaviour of the option price for small values of the illiquidity parameter is also analysed and a numerical procedure along with some numerical results is included.

show abstract

Section: Numerical Resultsmentioning

confidence: 99%

Option pricing in a CEV model with liquidity costs

Turek

2016

Appl. Math. (Warsaw)

View full text Add to dashboard Cite

show abstract

“…The binomial tree is constructed along the methodology developed by Nawalkha and Beliaeva (2007) who present an extension of the initial approach by Nelson and Ramaswamy (1990) (see "Appendix 5" for details on this methodology). The time step is daily, and we numerically check that this time discretization provides sufficient accuracy for pricing discount bonds.…”

Section: Evidence For Prepayment Riskmentioning

confidence: 99%

“…We outline the procedure developed by Nawalkha and Beliaeva (2007). The CIR process for the short rate has non-constant volatility.…”

Section: Appendix 2: Valuation Of B ∞ (C R)mentioning

confidence: 99%

See 1 more Smart Citation

Prepayment risk on callable bonds: theory and test

François

Pardo

2015

Decisions Econ Finan

View full text Add to dashboard Cite

We develop a framework for analyzing prepayment risk on defaultable callable bonds. We argue that prepayment risk emanates from the following informational asymmetry: Callable bond traders cannot determine the issuer's firm valuemaximizing call policy, and their best anticipation is the optimal refinancing policy given by a term structure model. We show that, from the callable bond holder perspective, the issuer's departure from the optimal refinancing policy translates into an accrued exposure to market risk. The prepayment risk magnitude represents this risk transfer, and we show that callable bond traders can infer it from observable bond characteristics. Tests on callable bond transaction data provide strong evidence for prepayment risk and validate our conjecture that insurance companies trade callable bonds to reduce their exposure to prepayment risk magnitude.

show abstract

References

2012

Dynamic Term Structure Modeling

View full text Add to dashboard Cite

Efficient Trees for CIR and CEV Short Rate Models

Cited by 18 publications

References 34 publications

Option pricing in a CEV model with liquidity costs

Option pricing in a CEV model with liquidity costs

Prepayment risk on callable bonds: theory and test

References

Contact Info

Product

Resources

About