A Term Structure Model for Dividends and Interest Rates

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

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, Forthcoming in Mathematical Finance, Available at SSRN: https://ssrn.com/abstract=3016310 or http://dx.doi.org/10.2139/ssrn.3016310