Simulation of interest rate options using ARCH

The autoregressive conditional heteroskedasticity (ARCH) estimation procedure provides a specification of the error terms as well as estimates of the coefficients. A simple interest rate equation is estimated using least squares and also using ARCH. Then the stochastic simulation methodology is extended to the ARCH process and Treasury Bond call options are evaluated. Interestingly when ARCH is compared to least squares it is found that the difference in coefficients estimates has a small effect, while the different simulation procedures have a large effect on the value of Treasury Bond call options

Simulation of interest rate options using ARCH

The autoregressive conditional heteroskedasticity (ARCH) estimation procedure provides a specification of the error terms as well as estimates of the coefficients. A simple interest rate equation is estimated using least squares and also using ARCH. Then the stochastic simulation methodology is extended to the ARCH process and Treasury Bond call options are evaluated. Interestingly when ARCH is compared to least squares it is found that the difference in coefficients estimates has a small effect, while the different simulation procedures have a large effect on the value of Treasury Bond call options.ARCH model; simulation; interest rate; Treasury bond call options

Sharing among Clubs: A Club of Clubs Theory.

This article investigates interclub sharing arrangements as a means for coping with random utilization without imposing capacity constraints that require members to be turned away. The optimal sharing rule and toll are identified for a two-club sharing scheme. When optimal sharing is invoked, the Pareto-optimal provision and membership size are determined for the two clubs and then contrasted with the Nash equilibrium, characterized by interclub easy riding. The use of a nonzero toll is shown to curtail easy riding but at the expense of too little sharing. An institutional arrangement, in which the club rather than the members pays the sharing toll, is shown to cause less distortion. Copyright 1992 by Royal Economic Society.

Alternative Specifications of the Error Process in the Stochastic Simulation of Econometric Models.

This paper analyzes the stochastic simulation of econometric models using three different methods for specifying the probability distribution of the structural error terms. The impact of these different assumptions on the simulation bias and model variance is explored empirically. Monte Carlo variance reduction techniques are used to distinguish the effects of the different specifications. Copyright 1990 by John Wiley & Sons, Ltd.

Sharpe and Treynor Ratios on Treasury Bonds

We challenge asset pricing theory with numerous stylized facts regarding risk and return on U.S. Treasury securities. Most striking is our finding that reward/risk ratios vary inversely with maturity and are incredibly high for short-term bills. Apparently investors would do much better engaging in highly leveraged investments in bills instead of purchasing long-maturity bonds or common stocks. Simulations of estimated three-factor affine term structure models do not replicate the high ratios of reward to risk for bills. Other results include business cycle patterns in risk premiums, volatility, and the reward to volatility that vary with maturity.

Incentive Conflicts, Bundling Claims, and the Interaction among Financial Claimants.

The authors show that for certain capital structures equity has an incentive to buy out another claim and alter the firm's investment strategy so as to maximize the combined value of equity and the acquired claim. This restructuring may reintroduce agency problems into capital structures which appear to avoid agency conflicts. By bundling claims, it is possible to avoid this agency problem. The agency problem is also eliminated.by dispersed ownership of the claims. Copyright 1993 by American Finance Association.

Imperfect Product Testing and Market Size.

The authors consider an imperfect test of product quality and ask how it interacts with adverse selection to affect market size. Although one might expect adverse selection to be mitigated, there are scenarios where it is exacerbated. Also, two counterintuitive comparative static results emerge. First, a small increase in the test cost can increase the equilibrium expected profits earned by sellers of higher quality units and so expand the market. Second, the equilibrium expected profits earned by sellers with lower quality units can be increased by a small improvement in the accuracy of an imperfect test. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.