Negative interest rates effects on option pricing: Back to basics?
| Autor: | Martina Mulas, Giacomo Burro, Simone Ligato, Pier Giuseppe Giribone, Francesca Querci |
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| Jazyk: | angličtina |
| Rok vydání: | 2017 |
| Předmět: |
Money market
050208 finance Financial economics Option pricing media_common.quotation_subject 05 social sciences negative interest rates Black–Scholes framework Bachelier model Interest rate Valuation of options 0502 economics and business Economics 050207 economics Rational pricing Rendleman–Bartter model media_common |
| Popis: | We provide the first formal investigation of the consequences of negative interest rates in the Eurozone on the pricing of interest rate options. Since the money market rates settled in negative territory and other market segments experienced negative yields, the broader financial community has had to face an unknown environment. The well-known Black–Scholes (BS) framework has become unfeasible for interest rate option valuation. First of all, no-arbitrage properties are breached, allowing arbitrage opportunities. More, the BS framework’s assumption of a log-normal distribution of the underlying rates does not stand with negative interest rates. We argue that the most notable approach which allows interest rate option pricing is [Bachelier, L (1900). Théorie de la speculation, 3rd Annales scientifiques de l’École Normale Supēérieure 17, 21–86.], which assumes a normal distribution of the underlying rates. We demonstrate that the Bachelier model represents an answer to the critical issues that are raised in our study. Still, we highlight that it is far from being an accurate pricing model. Our research aims to light up an intense debate about alternative solutions among academics, financial professionals and institutions, and policy makers. |
| Databáze: | OpenAIRE |
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