Bikbov, Ruslan and Chernov, Mikhail (2009) Unspanned stochastic volatility in affine models: evidence from Eurodollar futures and options. Management Science, 55 (8). pp. 1292-1305. ISSN 0025-1909
Full text not available from this repository.Abstract
Unspanned stochastic volatility (USV) refers to the inability of bonds to replicate volatility-sensitive derivative securities. Affine term structure models require special restrictions on the parameters to exhibit USV. We use a joint Eurodollar futures and options data set to estimate affine three-factor models with and without USV restrictions. The unrestricted model captures prices of futures and options well. Option pricing errors are much larger in the USV model. The USV model is rejected in favor of the unrestricted model based on the likelihood ratio and Wald tests. We use the implications of the unrestricted model as a benchmark for understanding the extant evidence that favors USV. Specifically, we replicate extant tests in samples simulated from the unrestricted model. We show that none of the existing findings contradict the model without USV restrictions.
| Item Type: | Article |
|---|---|
| Official URL: | http://www.informs.org/Pubs/ManSci |
| Additional Information: | © 2009 INFORMS |
| Divisions: | Finance |
| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
| Date Deposited: | 08 Feb 2011 09:32 |
| Last Modified: | 14 Feb 2024 06:27 |
| URI: | http://eprints.lse.ac.uk/id/eprint/32237 |
Actions (login required)
 |
View Item |
