An empirical comparison of forward-rate and spot-rate models for valuing interest-rate options

Article Abstract:

Research based on data from the German market for interest-rate warrants from 1990 to 1993 provides empirical evidence about whether spot- or forward-rate models are more suitable for supporting the measurement, control and supervision of interest-rate risk. It has been shown that the one-factor forward rate model with linear proportional volatility and the two spot-rate models with two factors perform much better than the other four models for this period. In particular, the one-factor forward-rate model with linear proportional volatility and the two-factor spot-rate model with stochastic volatility perform very well.

Risk assessment

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Transition densities for interest rate and other nonlinear diffusions

Article Abstract:

This paper applies to interest rate models the theoretical method developed in Ait-Sahalia (1998) to generate accurate closed-form approximations to the transition function of an arbitrary diffusion. While the main focus of this paper is on the maximum-likelihood estimation of interest rate models with otherwise unknown transition functions, applications to the valuation of derivative securities are also briefly discussed. (Reprinted by permission of the publisher.)

Evaluation, Derivatives (Financial instruments)

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