A Bayesian Approach to the Empirical Valuation of Bond Options

Posted: 23 Dec 1998

See all articles by Peter C. Schotman

Peter C. Schotman

Maastricht University - Department of Finance

Date Written: August 1994

Abstract

In this paper we propose and implement a Bayesian procedure for the empirical valuation of bond options given the observed term structure of interest rates, and given assumptions about the time series behavior of the instantaneous spot rate. The Bayesian approach is motivated by some empirical problems that arise if the implied volatility is estimated directly by cross sectional fitting of the yield curve. The proposed method is applied to a dataset of Dutch bond prices.

JEL Classification: F30

Suggested Citation

Schotman, Peter C., A Bayesian Approach to the Empirical Valuation of Bond Options (August 1994). Available at SSRN: https://ssrn.com/abstract=5648

Peter C. Schotman (Contact Author)

Maastricht University - Department of Finance ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3862 (Phone)
+31 43 388 4875 (Fax)

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