This paper considers a class of Heath-Jarrow-Morton (1992) term structure models, characterized by time deterministic volatilities for the instantaneous forward rate. The bias that arises from using observed futures yields as a proxy for the unobserved instantaneous forward rate is analyzed. The...

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...

For finite dimensional factor models, the paper studies general quadratic term structures. These term structures include as special cases the affine term structures and the Gaussian quadratic term structures, previously studied in the literature. We show, however, that there are other,...

In this paper we study a fairly general Wiener driven model for the term structure of forward prices. The model, under a fixed martingale measure, Q, consists of two infinite dimensional stochastic differential equations (SDEs). The first system is a standard HJM model for (forward) interest...

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...

This paper presents a benchmarking model for validation of default probabilities of listed companies for Basel II purposes. The model is based on the recent studies on the predictive capability of structural credit risk models. Benchmark ratings and one-year default probabilities are assigned to...

Following the method of Pesaran, Shin and Smith (1999), this study extends the results of Sun, Lin and Nieh (2007) to investigate the risk diversification issue of individual corporate bonds in portfolios. This is one of the few studies on the decomposition of individual corporate yield spreads....

We conduct an extensive empirical analysis of VIX derivative valuation models before, during and after the 2008-2009 fi nancial crisis. Since the restrictive mean reversion and heteroskedasticity features of existing models yield large distortions during the crisis, we propose generalisations...