A Term Structure Model for Dividends and Interest Rates

42 Pages Posted: 14 Aug 2017 Last revised: 20 Mar 2019

See all articles by Damir Filipović

Damir Filipović

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Sander Willems

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Date Written: March 14, 2019

Abstract

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

Filipovic, Damir and Willems, Sander, A Term Structure Model for Dividends and Interest Rates (March 14, 2019). Swiss Finance Institute Research Paper No. 17-52. Available at SSRN: https://ssrn.com/abstract=3016310 or http://dx.doi.org/10.2139/ssrn.3016310

Damir Filipovic

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

HOME PAGE: http://people.epfl.ch/damir.filipovic

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Sander Willems (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Station 5
Odyssea 1.04
1015 Lausanne, CH-1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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