The Relationship Between Risk and Maturity In A Stochastic Setting |
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Authors: | Paul H Zipkin |
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Institution: | Graduate School of Business Columbia University New York, NY |
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Abstract: | This paper explores the interest rate sensitivity of the prices of bonds and other securities when the instantaneous interest rate follows a Markov process. We show that whenever the interest rate describes a diffusion process the sensitivity of zero-coupon bonds increases with maturity. More generally, we characterize the risk-maturity relationship for contingent claims. This investigation yields a new property of option prices in the case where the underlying security price is a diffusion. |
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Keywords: | Markov processes zero-coupon bonds interest rate options |
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