American bond option pricing in one-factor dynamic term structure models

Arbitrage-tree pricing of American options on bonds in one-factor dynamic term structure models is investigated. We re-derive a general decomposition result which states that the American bond option premium can be split into the value of an otherwise equivalent European option and anearly exercise premium. This extends earlier work on American equity options by e.g. Kim (1990), Jamshidian (1992) and Carr, Jarrow, and Myneni (1992) and parallels recent work by Jamshidian (1991, 1992, 1993) and Chesney, Elliott, and Gibson (1993). We examine a Gaussian class of special cases in some detail and provide a variety of numerical valuation results.An earlier version of the paper was entitled American Bond Option Pricing in One-Factor Spot Interest Rate Models.I am grateful for many helpful comments from two anonymous referees, the participants of the Second Nordic Symposium on Contingent Claims Analysis in Finance held in Bergen, Norway in May of 1994 and from the participants of the EIASM Doctoral Tutorial held in connection with the 1994 EFA annual meeting in Bruxelles. I am particularly indebted to Krishna Ramaswamy for his help and advice during my stay as visiting doctoral fellow at the Wharton School of the University of Pennsylvania. Financial support from the Aarhus University Research Foundation (Grants # E-1994-SAM-1-1-72 & E-1995-SAM-1-59), the Danish Social Science Research Council, and the Danish Research Academy is gratefully acknowledged. All errors and omissions are my own.     

Empirical performance of Gaussian affine dynamic term structure models in the presence of autocorrelation misspecification bias

Recently, several authors have documented the presence of estimation bias in Gaussian affine dynamic term structure models (GADTSM). However, only a few applications involving its impact on the empirical performance of GADTSM exist in the extant literature, and these studies focus solely on discrete-time vector autoregressive (VAR) based GADTSM and concentrate on issues of small-sample bias and persistence. In this paper, we provide a comprehensive investigation of this issue that includes the estimation of both discrete-time VAR based GADTSM and continuous-time GADTSM at multiple data frequencies through a unique empirical design and two Monte Carlo simulation experiments, within which we construct estimation bias from the serial correlation in yield pricing errors. Our findings show that, although, empirical performance of all studied GADTSM are severely impacted by estimation bias, discrete-time GADTSM are more severely impacted by estimation bias than continuous-time GADTSM. Building on theoretical arguments developed in previous works, we attribute this finding to the strong dependence of discrete-time VAR based GADTSM on the ordinary least squares econometric technique relative to the continuous-time GADTSM for which general maximum likelihood estimation is more suitable.     

Valuation implications of regulatory climate for utilities facing future environmental costs

This study analyzes the interrelation between the quality of the rate-regulatory process (regulatory climate) and the firm's exposure to future environmental liabilities using a sample of U.S. electric utilities during a period of elevated environmental exposure. We conjecture that investors value these future costs through a lens that incorporates the quality of the firm's regulatory climate. Our results indicate investors discount share price by 8 to 10% for 85% of the sample's investor-owned utilities, dependent upon regulatory quality. In addition to raising an explicit disclosure issue, these valuation results, more importantly, raise societal implications for an industry that will be most heavily impacted by any future regulatory restrictions of carbon dioxide (CO₂).     

我国短期信贷结构对经济增长的动态效应分析——来自2000—2008年的经验数据

本文以我国2000年至2008年的季度数据为样本,在VAR模型的框架下,运用Granger因果检验、误差修正模型、脉冲响应与方差分解预测等计量方法,分析了短期信贷结构对经济增长的动态效应。结果表明：我国短期信贷结构发展不平衡,短期商业贷款、工业贷款能更为迅速的拉动经济增长,而短期建筑业贷款、农业贷款对经济增长的促进作用却不是很明显。     

The impact of audit penalty distributions on the detection and frequency of fraudulent reporting

We investigate how the distribution of the penalties incurred by auditors for failing to detect fraud influences their effort to detect fraud and auditees’ commission of fraud. We compare a probabilistic, skewed audit penalty to a penalty that automatically imposes the expected penalty of the probabilistic distribution (hereafter, a deterministic penalty). Our experiments show that a deterministic penalty with the same expected value of a probabilistic, skewed penalty increases audit effort to detect fraud and decreases fraudulent reporting by auditees and that these benefits hold in a game involving both auditee and auditor players.     

Pro-producer regulation and accounting for assets: The case of electric utilities

This paper's thesis is that rate-of-return regulation of the electric utility industry was a pro-producer regulatory policy, and that supra-competitive returns were earned by regulated utilities even while their accounting rate-of-returns met the ‘fair’ return constraint established by law. It is argued that this was accomplished by using the accounting system to revalue upward the asset bases of regulated utilities. The empirical results support this hypothesis in that utilities regulated by state commissions had abnormally high book values for their assets compared with unregulated utilities in 1917 and 1922.     

The term structure of the forward premium

Most studies of the efficiency of the foreign exchange market focus on a single maturity — usually a one month forward exchange rate. However, one observes that forward contracts of many maturities are simultaneously traded in the foreign exchange market. The hypothesis that the foreign exchange market uses all available information has implications for the joint behavior of forward exchange rates of various maturities. This paper proposes an equilibrium theory of the term structure of the forward premium. The model is tested using data on the German and Canadian exchange rates; the results indicate that the data are consistent with the theory for Germany and inconsistent with the theory for Canada.     

On the term structure of interest rates

The paper presents a valuation formula for default free bonds for a certain class of tastes when the instantaneously riskfree rate of interest follows a geometric Wiener process. Properties of the resulting term structure of interest rates are studied, and an application of the analysis to the pricing of Treasury Bills is proposed.     

Estimating the term structures of corporate debt

This paper investigates the corporate bond market by estimating monthly interest rate term structures for investment grade credit classes using both S&P's and Moody's ratings. Term structures are modeled by a piecewise constant forward rate curve and estimated on noncallable coupon paying bonds issued by industrial firms. The iterative estimation algorithm minimizes the sum of squared errors between market prices and model prices while identifying and removing outliers from the sample. Although the forward rate model is successful at pricing corporate debt, additional factors are found to be significant at explaining the residual price error that remains after the forward rate model is fit to market prices. Six necessary no-arbitrage conditions are derived for the term structures of risky and risk-free debt. Occasionally, some of these no-arbitrage conditions are violated and a few violations are asymptotically statistically significant. Finally, trading strategies that capture mispricing in the corporate debt market and violations of no-arbitrage bounds are discussed.This paper was adapted from my dissertation, completed at Cornell University. An earlier version of this paper was titled The Term Structures of Corporate Debt. Thanks to participants at the Cornell University finance workshop, Warren Bailey, Peter Carr, Antoine Giannetti, and especially Robert Jarrow for their helpful comments.     

Taylor rules and the term structure

The expectations model of the term structure has been subjected to numerous empirical tests and almost invariably rejected, with the failure generally attributed to systematic expectations errors or to shifts in risk premia. Rules for monetary policy designed along the lines of Taylor [1993. Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy 39, 195-214] specify that the central bank adjusts short-term yields in response to deviations of inflation and output gaps from target level. Such rules give a good empirical account of the behavior of the short-term interest rate. Combining the Taylor rule and expectations theory, it is possible to generate—along lines pioneered by Campbell and Shiller [1987. Cointegration and tests of present value models. Journal of Political Economy 95, 1062-1088]—a series of theoretical long-term interest rates. When such theoretical rates are calculated for the US over 1980-2004, considerable support for the expectations theory emerges.     

Performance indicators in the longer term

At present, managers in the public services are located somewhere along the learning curve in the use of performance indicators. As systems bed down, it ought to get easier. At that point, however, political attention and support often fades, and managers learn how to manipulate the indicators for their own purposes. The dynamics of this process need careful examination.     

The information in the term structure

This paper presents a regression approach to measuring the information in forward interest rates about time varying premiums and future spot interest rates. Like earlier work, the regressions identify variation in the expected premiums on longer-maturity Treasury bills. The more novel evidence concerns the forecasts of future spot rates in forward rates. The regressions provide evidence that the one-month forward rate has power to predict the spot rate one month ahead. During periods preceding 1974, forward rates have reliable forecast power for one-month spot rates up to five months in the future.     

An ODE approach for the expected discounted penalty at ruin in a jump-diffusion model

Under the assumption that the asset value follows a phase-type jump-diffusion, we show that the expected discounted penalty satisfies an ODE and obtain a general form for the expected discounted penalty. In particular, if only downward jumps are allowed, we get an explicit formula in terms of the penalty function and jump distribution. On the other hand, if the downward jump distribution is a mixture of exponential distributions (and upward jumps are determined by a general Lévy measure), we obtain closed-form solutions for the expected discounted penalty. As an application, we work out an example in Leland’s structural model with jumps. For earlier and related results, see Gerber and Landry [Insur. Math. Econ. 22:263–276, 1998], Hilberink and Rogers [Finance Stoch. 6:237–263, 2002], Asmussen et al. [Stoch. Proc. Appl. 109:79–111, 2004], and Kyprianou and Surya [Finance Stoch. 11:131–152, 2007].      

用三个代表思想指导师德建设

“三个代表”是我们党的立党之本,执政之基、力量之源,把用“三个代表”主要思想来武装教师队伍作为头等重要的任务抓紧、抓实、抓好,具有权为重大的现实意义和长远的指导意义。     

A production-based model for the term structure

This paper considers the term structure of interest rates implied by a production-based asset pricing model in which the fundamental drivers are investment in equipment and structures as well as inflation. The model matches the average yield curve up to five-year maturity almost perfectly. Longer term yields are roughly as volatile as in the data. The model also generates time-varying bond risk premiums. In particular, when running Fama-Bliss regressions of excess returns on forward premiums, the model produces slope coefficients of roughly half the size of the empirical counterparts. Closed-form expressions highlight the importance of the capital depreciation rates for interest rate dynamics.     

A comparison of diffusion models of the term structure

A number of different continuous time approaches that have been developed to model the term structure of interest rates are examined. These techniques span the interest rate literature over the last 20 years or so, and are the most commonly used among both academics and practitioners. We view this paper as a reference for the different term structure models, aiming to bring together the three most commonly used approaches, emphasizing their differences, analysing their respective advantages and disadvantages, and with explicit representations where they exist for prices of discount bonds.     

Banks’ exposure to interest rate risk, their earnings from term transformation, and the dynamics of the term structure

We use a unique dataset of German banks’ exposure to interest rate risk to derive the following statements about their exposure to this risk and their earnings from term transformation. The systematic factor for the exposure to interest rate risk moves in sync with the shape of the term structure. At bank level, however, the time variation of the exposure is largely determined by idiosyncratic effects. Over time, changes in earnings from term transformation have a large impact on interest income. Across banks, however, the earnings from term transformation do not seem to be a decisive factor for the interest margin.     

Arbitrage bounds for the term structure of interest rates

This paper proposes a methodology for simultaneously computing a smooth estimator of the term structure of interest rates and economically justified bounds for it. It unifies existing estimation procedures that apply regression, smoothing and linear programming methods. Our methodology adjusts for possibly asymmetric transaction costs. Various regression and smoothing techniques have been suggested for estimating the term structure. They focus on what functional form to choose or which measure of smoothness to maximize, mostly neglecting the discussion of the appropriate measure of fit. Arbitrage theory provides insight into how small the pricing error will be and in which sense, depending on the structure of transaction costs. We prove a general result relating the minimal pricing error one incurs in pricing all bonds with one term structure to the maximal arbitrage profit one can achieve with restricted portfolios.     

老年长期照护研究综述

本文对长期照护概念从"长期"和"照护"两个方面进行剖析,从长期照护模式分类、长期照护评估机制、法律法规和保险制度等方面介绍各国研究状况,提出我国发展长期照护制度的建议:满足照护需求,构建合理的长期照护模式;发展老龄产业,培养优质的长期照护人才;健全法律法规,构建长期照护保险制度;提供护理津贴,合理分担财政负担;发展评估,及时干预老年人健康状况。     

老年长期照护研究综述

本文对长期照护概念从长期和照护两个方面进行剖析,从长期照护模式分类、长期照护评估机制、法律法规和保险制度等方面介绍各国研究状况,提出我国发展长期照护制度的建议:满足照护需求,构建合理的长期照护模式;发展老龄产业,培养优质的长期照护人才;健全法律法规,构建长期照护保险制度;提供护理津贴,合理分担财政负担;发展评估,及时干预老年人健康状况。