The zero-coupon yield curve is a common input for most financial purposes. The authors consider three popular yield curve datasets, and explore the extent to which the decision as to what dataset to use for an application may have implications on the results. The paper illustrates why such...

We study the term structure of variance swaps, equity and variance risk premia. A model-free analysis reveals a significant price jump component in variance swap rates. A model-based analysis shows that investors' willingness to ensure against volatility risk increases after a market drop. This...

This paper describes a financial market modelling framework that exploits the notion of a deflator . The denominations of the deflator measured in units of primary assets form a minimal set of basic financial quantities that completely specify the overall market dynamics, where deflated asset...

We show that at-the-money implied volatility of options on futures of 5-year Treasury notes (Treasury ‘yield implied volatility') predicts both the growth rate and volatility of gross domestic product, as well as of other macroeconomic variables, like industrial production, consumption, and...

Although the effect of interest rate stochasticity can safely be ignored for short-dated exchange traded volatility derivatives, this is not the case for the kind of long-dated OTC derivatives often used by insurance companies and other financial institutions. We therefore extend existing...

We consider a hybrid model for stocks and interest rates as it is proposed by GDV (Gesamtverband der Deutschen Versicherungswirtschaft) to assign market consistent values to the technical provisions of german life insurance companies. In this model, stock prices are modeled with a Black Scholes...

This is a short comment on Kung and Lee's paper. In this note, we show that the formulae given in Kung and Lee (2009) for European call and put option under Merton's model of the short rate are incorrect. We give the correct derivations making use of the "change of numeraire" technique which is...

The interest rate model by Hull and White allows to calculate an explicit formula for the price of zero bonds. From this pricing formula we deduce explicit formulas for the volatility of the instantaneous forward rate, the volatility of the interest rate (both the spot rate and interest rates of...

We construct multi-currency models with stochastic volatility and correlated stochastic interest rates with a full matrix of correlations. We first deal with a foreign exchange (FX) model of Heston-type, in which the domestic and foreign interest rates are generated by the short-rate process of...

We define an equity-interest rate hybrid model in which the equity part is driven by the Heston stochastic volatility [Hes93], and the interest rate (IR) is generated by the displaced-diffusion stochastic volatility Libor Market Model [AA02]. We assume a non-zero correlation between the main...