TY - JOUR
T1 - Pricing interest rate derivatives under monetary changes
AU - De Genaro, Alan
AU - Avellaneda, Marco
N1 - Funding Information:
we are indebted to numerous seminar participants at Morgan Stanley (NYC), XP Investments (Brazil), EAESP/FGV, IMPA for their comments. Alan De Genaro gratefully acknowledges the financial support of B3 and Courant Institute for its generous hospitality during the period that part of this research was conducted. Any remaining errors are our own.
Publisher Copyright:
© 2018 World Scientific Publishing Company.
Copyright:
Copyright 2018 Elsevier B.V., All rights reserved.
PY - 2018/9/1
Y1 - 2018/9/1
N2 - The goal of this paper is to develop a reduced-form model for pricing derivatives on the overnight rate. The model incorporates jumps around central bank (CB) meetings. More specifically, rate changes are decomposed into fluctuations between CB meetings and deterministic timed jumps following CB meetings. This approach is useful for practitioners, since it allows the extraction of expectations regarding central bank decisions embedded in liquid instruments, as well as the use of these expectations for the pricing of less liquid derivatives, such as options, in a consistent manner. We discuss applications to 30-Day Fed funds options and IDI options traded in Brazil.
AB - The goal of this paper is to develop a reduced-form model for pricing derivatives on the overnight rate. The model incorporates jumps around central bank (CB) meetings. More specifically, rate changes are decomposed into fluctuations between CB meetings and deterministic timed jumps following CB meetings. This approach is useful for practitioners, since it allows the extraction of expectations regarding central bank decisions embedded in liquid instruments, as well as the use of these expectations for the pricing of less liquid derivatives, such as options, in a consistent manner. We discuss applications to 30-Day Fed funds options and IDI options traded in Brazil.
KW - Overnight interest rate
KW - deterministic timed jumps
KW - interest rate derivatives
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U2 - 10.1142/S0219024918500371
DO - 10.1142/S0219024918500371
M3 - Article
AN - SCOPUS:85052965379
VL - 21
JO - International Journal of Theoretical and Applied Finance
JF - International Journal of Theoretical and Applied Finance
SN - 0219-0249
IS - 6
M1 - 1850037
ER -