Jackknifing Bond Option Prices

Prices of interest rate derivative securities depend cruciallyon the mean reversion parameters of the underlying diffusions.These parameters are subject to estimation bias when standardmethods are used. The estimation bias can be substantial evenin very large samples and much more serious than the discretizationbias, and it translates into a bias in pricing bond optionsand other derivative securities that is important in practicalwork. This article proposes a very general and computationallyinexpensive method of bias reduction that is based on Quenouille's(1956; Biometrika, 43, 353–360) jackknife. We show howthe method can be applied directly to the options price itselfas well as the coefficients in the models. We investigate itsperformance in a Monte Carlo study. Empirical applications toU.S. dollar swap rates highlight the differences between bondand option prices implied by the jackknife procedure and thoseimplied by the standard approach. These differences are largeand suggest that bias reduction in pricing options is importantin practical applications.     

Frictions, Heterogeneity and Optimality in Mortgage Modeling

The purpose of this article is to provide a unified framework for incorporating frictions into a theoretical options-pricing model (OPM) for mortgages. This article presents formulation for a frictions-adjustable mortgage model that integrates borrower heterogeneity while simultaneously preserving prepayment and default financial decisions. Our model demonstrates the flexibility of the OPM by simulating separate and concurrent effects of three categories of frictions on the mortgage and mortgage components. Researchers can use our example formulation to determine the effects of specific borrower characteristics on mortgage values without destroying the options theoretic framework.     

PROJECTION MODELS FOR U.K. FOOD AND AGRICULTURE*

Successful policy planning depends to a large extent on being able to predict the consequences of alternative measures. In the case of agriculture, it is important to know how the future pattern of supply and demand in this sector will be affected by government action on specific issues such as farm price support, and by expected trends in macro-economic variables such as national incomes and population. This paper illustrates the application of a model of U.K. agriculture to the projection of changes in the production and consumption of food and agriculture products between now and 1975. The demand projections show the effect of important levies, and of joining the E.E.C, on future expenditure on food, while the supply projections show how the output of a number of agricultural commodities will be affected by adjusting farm prices towards E.E.C. levels.