We consider forward rate rate models of HJM type, as well as more general infinite dimensional SDEs, where the volatility/diffusion term is stochastic in the sense of being driven by a separate hidden Markov process. Within this framework we use the previously developed Hilbert space realization...

This paper builds on existing asset pricing models in an intertemporal CAPM framework to investigate the pricing of options on interest rate futures. It addresses the issues of selecting the preferred pricing kernel model by employing the second Hansen-Jagannathan distance (HJD) criterion. This...

We propose a numerical procedure for the pricing of financial contracts whose contingent claims are exposed to two sources of risk: the stock price and the short interest rate. More precisely, in our pricing framework we assume that the stock price dynamics is described by the Cox, Ross...

We solve two optimal stopping problems whose payoff functions are the maximum and the minimum of two state variables driven by the Ornstein-Uhlenbeck processes. We consider a class of problems where we obtain analytical solutions. Furthermore, by making use of the analytical results we study...

This paper investigates the relation between risk-free rates and ex-ante market volatility. It derives a theoretical model implying a negative linear relation between risk-free rates and variance futures prices. The latter are employed as a direct market-based ex-ante estimate of risk-neutral...

This paper values interest rate options using an improved parametric pricing kernel in the Merton (1973) intertemporal capital asset pricing model framework. The pricing kernel is driven by the real interest rate, the Jensen's alpha, and the market volatility. Parameters in the pricing kernel...

Whereas the callable-bond market used to emphasize primarily public debt - Government Agencies, and both investment grade and non-investment corporate debt - that has changed dramatically over the past twenty years, in part due to the low prevailing rates of interest as well as some systematic...

The discrete-time multifactor Vasiček model is a tractable Gaussian spot rate model. Typically, two- or three-factor versions allow one to capture the dependence structure between yields with different times to maturity in an appropriate way. In practice, re-calibration of the model to the...

This paper provides a review of the main features of asset pricing models. The review includes single-factor and multifactor models, extended forms of the Capital Asset Pricing Model with higher order co- moments, and asset pricing models conditional on time-varying volatility.