Asset Pricing Under The Quadratic Class

We identify and characterize a class of term structure models where bond yields are quadratic functions of the state vector. We label this class the quadratic class and aim to lay a solid theoretical foundation for its future empirical application. We consider asset pricing in general and derivative pricing in particular under the quadratic class. We provide two general transform methods in pricing a wide variety of fixed income derivatives in closed or semi­closed form. We further illustrate how the quadratic model and the transform methods can be applied to more general settings.quadratic class; interest rates; term structure models; state price density; Markov process.

Examining Simple Joint Macroeconomic and Term-Structure Models: A Practitioner's Perspective

The primary objective of this paper is to compare a variety of joint models of the term structure of interest rates and the macroeconomy. To this end, we consider six alternative approaches. Three of these models follow from the work of Diebold and Li (2003) with a generalization in Bolder (2006). The fourth model is a regression-based approach motivated entirely by empirical considerations. The fifth model follows from the seminal work of Ang and Piazzesi (2003), who suggest a joint macro-finance model in a discrete-time affine setting. The final model, which we term an observed-affine model, represents an adjustment to the Ang-Piazzesi model that essentially relaxes restrictions on the state-variable dynamics by making them observable. The observed-affine model is similar in spirit to work by Colin-Dufresne, Goldstein, and Jones (2005) and Cochrane and Piazzesi (2006). Using monthly Canadian data from 1973 to 2005, we compare each of these models in terms of their out-of-sample ability to forecast the transition density of zero-coupon rates. We also examine a simple approach aimed at permitting a subset of the parameters in the non-affine models to vary over time. We find, similar to Bolder (2006), that the Diebold and Li (2003) motivated approaches provide the most appealing modelling alternative across our different comparison criteria.Econometric and statistical methods; Financial Markets; Interest rates

LIBOR additive model calibration to swaptions markets

In the current paper, we introduce a new calibration methodology for the LIBOR market model driven by LIBOR additive processes based in an inverse problem. This problem can be splitted in the calibration of the continuous and discontinuous part, linking each part of the problem with at-the-money and in/out -of -the-money swaption volatilies. The continuous part is based on a semidefinite programming (convex) problem, with constraints in terms of variability or robustness, and the calibration of the Lévy measure is proposed to calibrate inverting the Fourier Transform

Design and Estimation of Quadratic Term Structure Models

We consider the design and estimation of quadratic term structure models. We start with a list of stylized facts on interest rates and interest rate derivatives, classified into three layers: (1) general statistical properties, (2) forecasting relations, and (3) conditional dynamics. We then investigate the implications of each layer of property on model design and strive to establish a mapping between evidence and model structures. We calibrate a two­factor model that approximates these three layers of properties well, and illustrate how the model can be applied to pricing interest rate derivatives.quadratic model; term structure; positive interest rates; humps; expectation hy­pothesis; GMM; caps and floors.

The Norges Bank’s key rate projections and the news element of monetary policy: a wavelet based jump detection approach

This paper investigates the information content of the Norges Bank’s key rate projections. Wavelet spectrum estimates provide the basis for estimating jump probabilities of short- and long-term interest rates on monetary policy announcement days before and after the introduction of key rate projections. The behavior of short-term interest rates reveals that key rate projections have only little effects on market’s forecasting ability of current target rate changes. In contrast, longer-term interest rates indicate that the announcement of key rate projections has significantly reduced market participants’ revisions of the expected future policy path. Therefore, the announcement of key rate projections further improves central bank communication.Central bank communication, interest rate projections, wavelets, jump probabilities

Modelling FX smile : from stochastic volatility to skewness

Imperial Users onl

Fast Fiber Orientation Estimation in Diffusion MRI from kq-Space Sampling and Anatomical Priors

High spatio-angular resolution diffusion MRI (dMRI) has been shown to provide accurate identification of complex fiber configurations, albeit at the cost of long acquisition times. We propose a method to recover intra-voxel fiber configurations at high spatio-angular resolution relying on a kq-space under-sampling scheme to enable accelerated acquisitions. The inverse problem for reconstruction of the fiber orientation distribution (FOD) is regularized by a structured sparsity prior promoting simultaneously voxelwise sparsity and spatial smoothness of fiber orientation. Prior knowledge of the spatial distribution of white matter, gray matter and cerebrospinal fluid is also assumed. A minimization problem is formulated and solved via a forward-backward convex optimization algorithmic structure. Simulations and real data analysis suggest that accurate FOD mapping can be achieved from severe kq-space under-sampling regimes, potentially enabling high spatio-angular dMRI in the clinical setting.Comment: 10 pages, 5 figures, Supplementary Material