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dc.contributor.authorRecchioni, Maria Cristina
dc.contributor.authorSun, Yu
dc.contributor.authorTedeschi, Gabriele
dc.date.accessioned2017-04-11T15:05:10Z
dc.date.available2017-04-11T15:05:10Z
dc.date.issued2016
dc.identifier.urihttp://hdl.handle.net/10234/167208
dc.descriptionRECCHIONI, Maria Cristina; SUN, Yu; TEDESCHI, Gabriele. Can negative interest rates really affect option pricing? Empirical evidence from an explicitly solvable stochastic volatility model. Working Papers from Economics Department, Universitat Jaume I, núm. 2016/23
dc.description.abstractThe profound financial crisis generated by the collapse of Lehman Brothers and the European sovereign debt crisis in 2011 have caused negative values of government bond yields both in the U.S.A. and in the EURO area. This paper investigates whether the use of models which allow for negative interest rates can improve option pricing and implied volatility forecasting. This is done with special attention to foreign exchange and index options. To this end, we carried out an empirical analysis on the prices of call and put options on the U.S. S&P 500 index and Eurodollar futures using a generalization of the Heston model in the stochastic interest rate framework. Specifically, the dynamics of the option’s underlying asset is described by two factors: a stochastic variance and a stochastic interest rate. The volatility is not allowed to be negative but the interest rate is. Explicit formulas for the transition probability density function and moments are derived. These formulas are used to estimate the model parameters efficiently. Three empirical analyses are illustrated. The first two show that the use of models which allow for negative interest rates can efficiently reproduce implied volatility and forecast option prices (i.e., S&P index and foreign exchange options). The last studies how the U.S. three-month government bond yield affects the U.S. S&P 500 index.ca_CA
dc.format.extent36 p.ca_CA
dc.format.mimetypeapplication/pdfca_CA
dc.language.isoengca_CA
dc.publisherUniversitat Jaume I. Economics Departamentca_CA
dc.relation.isPartOfSeries2016; 23
dc.relation.hasVersionRECCHIONI, Maria Cristina; SUN, Yu; TEDESCHI, Gabriele. Can negative interest rates really affect option pricing? Empirical evidence from an explicitly solvable stochastic volatility model. Quantitative Finance, 2017, p. 1-19
dc.rightsThis is an Author's Original Manuscript of an article whose final and definitive form, the Version of Record, has been published in the Quantitative Finance, 2017, p. 1-19 [copyright Taylor & Francis], available online at: http://www.tandfonline.com/doi/abs/10.1080/14697688.2016.1272763?journalCode=rquf20
dc.subjectFinanceca_CA
dc.subjectOption pricingca_CA
dc.subjectStochastic volatility modelsca_CA
dc.subjectCalibration procedureca_CA
dc.titleCan negative interest rates really affect option pricing? Empirical evidence from an explicitly solvable stochastic volatility modelca_CA
dc.typeinfo:eu-repo/semantics/workingPaperca_CA
dc.rights.accessRightsinfo:eu-repo/semantics/openAccessca_CA
dc.relation.publisherVersionhttp://www.doctreballeco.uji.es/wpficheros/Recchioni_et_al_23_2016.pdfca_CA


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