| Autor: |
Man Chung Fung, Jan Baldeaux, Katja Ignatieva, Eckhard Platen |
| Rok vydání: |
2015 |
| Předmět: |
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| Popis: |
© 2015 Taylor & Francis. Abstract: Long-dated fixed income securities play an important role in asset-liability management, in life insurance and in annuity businesses. This paper applies the benchmark approach, where the growth optimal portfolio (GOP) is employed as numéraire together with the real-world probability measure for pricing and hedging of long-dated bonds. It employs a time-dependent constant elasticity of variance model for the discounted GOP and takes stochastic interest rate risk into account. This results in a hybrid framework that models the stochastic dynamics of the GOP and the short rate simultaneously. We estimate and compare a variety of continuous-time models for short-term interest rates using non-parametric kernel-based estimation. The hybrid models remain highly tractable and fit reasonably well the observed dynamics of proxies of the GOP and interest rates. Our results involve closed-form expressions for bond prices and hedge ratios. Across all models under consideration we find that the hybrid model with the 3/2 dynamics for the interest rate provides the best fit to the data with respect to lowest prices and least expensive hedges. |
| Databáze: |
OpenAIRE |
| Externí odkaz: |
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