Pricing GDP Linked Securities

44 Pages Posted: 8 Apr 2014

See all articles by Oleg A. Ruban

Oleg A. Ruban

MSCI Inc.

Luiz Vitiello

University of Essex - Essex Business School

Ser-Huang Poon

Alliance Manchester Business School, University of Manchester; Alan Turing Institute

Date Written: April 7, 2014

Abstract

We propose a simple model for the valuation of sovereign growth linked bonds. The model is calibrated to potential GDP, output gap, real exchange rate and rating implied historical default probabilities. Bond prices are obtained by applying the Esscher transform on the simulated cash flows with the risk aversion parameter calibrated to match market prices of vanilla bonds of the sovereign (or a comparable sovereign). The model was applied to Argentinian data and its US$ vanilla bonds before being used to price Argentina's GDP warrants. Results indicate that our model produce valuations that are close to observed market prices.

Keywords: GDP linked bond, Incomplete Markets, Structural Models, Esscher transform, General Equilibrium

JEL Classification: D52, G13, C22

Suggested Citation

Ruban, Oleg A. and Vitiello, Luiz and Poon, Ser-Huang, Pricing GDP Linked Securities (April 7, 2014). Available at SSRN: https://ssrn.com/abstract=2421293 or http://dx.doi.org/10.2139/ssrn.2421293

Oleg A. Ruban

MSCI Inc. ( email )

88 Pine Street
2nd Floor
New York, NY 10005
United States

Luiz Vitiello

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Ser-Huang Poon (Contact Author)

Alliance Manchester Business School, University of Manchester ( email )

Alliance Manchester Business School
Booth Street West
Manchester, Manchester M15 6PB
United Kingdom
+44 161 275 4031 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.manchester.ac.uk/research/Ser-huang.poon/

Alan Turing Institute ( email )

British Library, 96 Euston Road
London, NW12DB
United Kingdom

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