Foreign Currency Options: Ex Post and Ex Ante Market Efficiency Tests

R. Stafford Johnson is Professor and Chair of the Department of Finance at Xavier University. Richard Zuber is Professor of Economics in the Department of Economics at the University of North Carolina at Charlotte. Lyle Fiore is Trust Fund Manager in the Trust Department of the First Third Bank in Cincinnati, Ohio. John Gandar is an Associate Professor of Economics in the Department of Economics at the University of North Carolina at Charloue

Binomial Interest Rate Trees: A Synopsis of Uses and Estimation Approaches

The option features embedded in many intermediate and long-term bonds and fixed-income securities have made the binomial interest rate tree approach to bond valuation the standard model for pricing debt securities. This paper reviews how the binomial model is used to price bonds with option features and mortgage-backed securities and how it is estimated

Mortgage-Backed Securities: A Synopsis

Today, mortgage-backed securities and their derivatives are some of the most popular securities held by institutional investors. Detailed explanations of how such securities are formed and valued, though, are usually beyond the scope of most investment textbooks. This paper, in turn, is a pedagogical review of such securities: their features, how mortgage-backed derivatives are constructed to address prepayment risk, and how the binomial model is used to value and analyze these interest-sensitive securities

Don't lose sleep on it: a re-examination of the daylight savings time anomaly

A recent study finds evidence of a new financial market anomaly linking daylight savings time changes with market returns - spring and fall daylight savings time weekends are typically followed by large negative returns - and that these returns are significantly lower than regular weekend average returns. The present study finds that neither the consistency nor the magnitude and statistical significance claimed for this anomaly survives serious scrutiny.

Binomial pricing of fixed-income securities for increasing and decreasing interest rate cases

The option features embedded in many bonds and fixed-income securities have made the binomial interest rate tree approach to bond valuation a valuable model for pricing debt securities. Fundamental to the application of the binomial model to bond valuation is the assumption about the underlying stochastic process. There are two general approaches to modelling stochastic interest rate movements using a binomial model - the equilibrium model and the calibration model. Both models assume that the interest rate's logarithmic return is normally distributed. However, a number of empirical studies have provided evidence that the return distributions of a number of securities exhibit persistent skewness. In modelling interest rate patterns, the existence of skewness in a binomial process impacts not only the values of the up and down parameters, but also the probabilities of the underlying rate increasing or decreasing each period. The purpose of this study is to show how a binomial model of interest rates can be extended to incorporate skewness and to illustrate the impact skewness can have on the pricing of bonds and mortgage backed securities - a security whose discount rate, as well as cash flows, are sensitive to interest-rate risk.