The Term Structure of Interest-Rate Futures Prices
45 Pages Posted: 3 Nov 2008
There are 3 versions of this paper
The Term Structure of Interest-Rate Futures Prices
The Term Structure of Interest-Rate Futures Prices.
Date Written: September 2001
Abstract
We derive general properties of two-factor models of the term structure of interestrates 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. In this model, the term structure shifts and tilts as the factor rates vary. The cross-sectional propertiesof the model derive from the solution of a two-dimensional, autoregressive process for the short-term rate, which exhibits both mean-reversion and a lagged persistence parameter. We show that the correlation of the futures rates is restricted by the no-arbitrage conditions of the model. In addition, we investigate the determinants of the volatilities and the correlations ofthe futures rates of various maturities. These are shown to be related to the volatility of the short rate, the volatility of the second factor, the degree of mean-reversion and the persistence of the second factor shock. We also discuss the extension of our model to three or more factors. We obtain specific results for futures rates in the case where the logarithm of the short-term rate [e.g., the London Inter-Bank Offer Rate (LIBOR)] follows atwo-dimensional process. We calibrate the model using data from Eurocurrencyinterest rate futures contracts, using alternative optimization criteria. We then derive the term structures of volatilities and correlations implied by the model.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
A Model of Corporate Bond Prices with Dynamic Capital Structure
-
A Comparison of Bond Pricing Models in the Pricing of Credit Risk
-
The Valuation of Caps, Floors and Swaptions in a Multi-Factor Spot-Rate Model
By Sandra Peterson, Richard C. Stapleton, ...
-
The Valuation of American-Style Swaptions in a Two-Factor Spot Futures Model
By Sandra Peterson, Richard C. Stapleton, ...
-
The Valuation of American-Style Swaptions in a Two-Factor Spot-Futures Model1
By Sandra Peterson, Richard C. Stapleton, ...