Pricing Treasury Inflation Protected Securities and Related Derivatives Using an Hjm Model

Jarrow, Robert A.; Yildirim, Yildiray

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Pricing Treasury Inflation Protected Securities and Related Derivatives Using an Hjm Model

Journal of Financial and Quantitative Analysis (JFQA), Vol. 38, No. 2, pp. 337-359, June 2003

34 Pages Posted: 6 Oct 2004 Last revised: 3 Feb 2011

See all articles by Robert A. Jarrow

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: February 1, 2011

Abstract

This paper uses an HJM model to price TIPS and related derivative securities. First, using the market prices of TIPS and ordinary U.S. Treasury securities, both the real and nominal zero-coupon bond price curves are obtained using standard coupon-bond price stripping procedures. Next, a three-factor arbitrage-free term structure model is fit to the time series evolutions of the CPI-U and the real and nominal zero-coupon bond price curves. Then, using these estimated term structure parameters, the validity of the HJM model for pricing TIPS is confirmed via its hedging performance. Lastly, the usefulness of the pricing model is illustrated by valuing call options on the inflation index.

Suggested Citation: Suggested Citation

Jarrow, Robert A. and Yildirim, Yildiray, Pricing Treasury Inflation Protected Securities and Related Derivatives Using an Hjm Model (February 1, 2011). Journal of Financial and Quantitative Analysis (JFQA), Vol. 38, No. 2, pp. 337-359, June 2003, Available at SSRN: https://ssrn.com/abstract=585828