A Term Structure Model for Dividends and Interest Rates
Forthcoming in Mathematical Finance
40 Pages Posted: 14 Aug 2017 Last revised: 26 May 2020
Date Written: March 14, 2019
Over the last decade, dividends have become a standalone asset class instead of a mere side product of an equity investment. We introduce a framework based on polynomial jump-diffusions to jointly price the term structures of dividends and interest rates. Prices for dividend futures, bonds, and the dividend paying stock are given in closed form. We present an efficient moment based approximation method for option pricing. In a calibration exercise we show that a parsimonious model specification has a good fit with Euribor interest rate swaps and swaptions, Euro Stoxx 50 index dividend futures and dividend options, and Euro Stoxx 50 index options.
Keywords: Dividend derivatives, interest rates, polynomial jump-diffusion, term structure, moment-based option pricing
JEL Classification: C32, G12, G13
Suggested Citation: Suggested Citation