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http://hdl.handle.net/2451/26313
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| Title: | The economic determinants of interest rate option smiles |
| Authors: | Deuskar, PRACHI
Gupta, ANURAG
SUBRAHMANYAM, MARTI G. |
| Issue Date: | 18-May-2007 |
| Series/Report no.: | FIN-07-016 |
| Abstract: | We address three questions relating to the interest rate options market:
What is the shape of the smile? What are the economic determinants of
the shape of the smile? Do these determinants have predictive power for
the future shape of the smile and vice versa? We investigate these
issues using daily bid and ask prices of euro (€) interest rate
caps/floors. We find a clear smile pattern in interest rate options. The
shape of the smile varies over time and is affected in a dynamic manner
by yield curve variables and the future uncertainty in the interest
rate markets; it also has information about future aggregate default
risk. Our findings are useful for the pricing, hedging and risk
management of these derivatives. |
| URI: | http://hdl.handle.net/2451/26313 |
| Appears in Collections: | Finance Working Papers
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