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Please use this identifier to cite or link to this item: http://ntour.ntou.edu.tw:8080/ir/handle/987654321/52265

Title: Empirical Performance of Multi-Factor Term Structure Models for Pricing and Hedging Eurodollar Futures Options,
Authors: I-Doun Kuo
Yueh-Neng Lin
Contributors: 國立臺灣海洋大學:航運管理學系
Date: 2009
Issue Date: 2019-06-14T08:37:38Z
Publisher: Review of Financial Economics
Abstract: Abstract: This article compares two one-factor, two two-factor, two three-factor models in the HJM class and Black's [Black, F. (1976). The pricing of commodity contracts. Journal of Financial Economics, 3, 167-179.] implied volatility function in terms of their pricing and hedging performance for Eurodollar futures options across strikes and maturities from 1 Jan 2000 to 31 Dec 2002. We find that three-factor models perform the best for 1-day and 1-week prediction, as well as for 5-day and 20-day hedging. The moneyness bias and the maturity bias appear for all models, but the three-factor models produce lower bias. Three-factor models also outperform other models in hedging, in particular for away-from-the-money and long-dated options. Making Black's volatility a square root or exponential function performs similar to one-factor HJM models in pricing, but not in hedging. Correctly specified and calibrated multifactor models are thus important and cannot be replaced by one-factor models in pricing or hedging interest rate contingent claims.
Relation: 18(1) pp.23-32
URI: http://ntour.ntou.edu.tw:8080/ir/handle/987654321/52265
Appears in Collections:[航運管理學系] 期刊論文

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