Can negative interest rates really affect option pricing? Empirical evidence from an explicitly solvable stochastic volatility model
comunitat-uji-handle:10234/9
comunitat-uji-handle2:10234/8643
comunitat-uji-handle3:10234/8644
comunitat-uji-handle4:
INVESTIGACIONMetadades
Títol
Can negative interest rates really affect option pricing? Empirical evidence from an explicitly solvable stochastic volatility modelData de publicació
2016Editor
Universitat Jaume I. Economics DepartamentTipus de document
info:eu-repo/semantics/workingPaperVersió de l'editorial
http://www.doctreballeco.uji.es/wpficheros/Recchioni_et_al_23_2016.pdfVersió
info:eu-repo/semantics/publishedVersionParaules clau / Matèries
Resum
The 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. ... [+]
The 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. [-]
Descripció
RECCHIONI, 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 ... [+]
RECCHIONI, 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 [-]
Drets d'accés
This 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
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info:eu-repo/semantics/openAccess
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info:eu-repo/semantics/openAccess
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