Term Structure Movements Implicit in Asian Option Prices
48 Pages Posted: 21 Mar 2018
Date Written: September 15, 2009
In this paper we implement dynamic term structure models that adopt bonds and Asian options in the estimation process. The goal is to analyze the pricing and hedging implications of term structure movements when options are (or not) included in the estimation process. We analyze how options affect the shape, risk premium and hedging structure of the dynamic factors. We find that the inclusion of options affects the loadings of the slope and curvature factors, and considerably changes the risk premium and hedging structure of all dynamic factors.
Keywords: Dynamic term structure models, latent factors, bond risk premium, Asian option pricing
JEL Classification: C51, G12
Suggested Citation: Suggested Citation