We derive general properties of two-factor models of the term structure of interest rates and, in particular, the process for futures prices and rates. Then, as a special case, we derive a no-arbitrage model of the term structure in which any two futures rates act as factors. The term structure...

Many valuation models in financial economics are developed using the pricing kernel approach to adjust for risk through the equivalent martingale representation. Often it is assumed, explicitly or implicitly, that the pricing kernel exhibits constant elasticity with respect to the price of the...

We derive a no-arbitrage model of the term structure in which any two futures rates act as factors. The term structure shifts and tilts as the factor rates vary. The cross-sectional properties of the model derive from the solution of a two-dimensional ARMA process for the short rate which...

The Geske-Johnson approach provides an efficient and intuitively appealing technique for the valuation and hedging of American-style contingent claims. Here, we generalize their approach to a stochastic-interest-rate-economy. The method is implemented using options exercisable on one of a finite...

We value American options on bonds using the Geske-Johnsan (1992). The method requires the valuation of European options with two and three possible exercise dates.It is shown that a risk-neutral valuation relationship along the lines of Black-Scholes (1973) model holds for option exercisable on...

We build a multi-factor, no-arbitrage model of the term structure of spot interest rates. The stochastic factors are the short-term interest rate and the premia of the futures rates over the short-term interest rates. In the three-factor version of the model, for example, the first factor is the...

In this paper, we investigate the pricing of Japanese yen interest rate swaps during the period 1990-96. We obtain measures of the spreads of the swap rates over comparable Japanese Government Bonds (JGBs) for different maturities and analyze the relationship between the swap spreads and credit...

We analyze the impact of option trading and margin rules on the behavior of informed traders and on the microstructure of stock and option markets. In the absence of binding margin requirements, the introduction of an options market causes informed traders to exhibit a relative trading bias...

We investigate the interaction of volatility smiles and liquidity in the euro (not;) interest rate option markets, using daily bid and ask prices of interest rate caps/floors. We find that liquidity variables have significant explanatory power for both curvature and asymmetry of the implied...

The objective of this paper is to provide a deeper insight into the links between financial markets and the real economy. To that end, we study the short-term anticipation and response of U.S. stock, Treasury, and corporate bond markets to the first release of U.S. macroeconomic information....