The pricing of interest rate-dependent securities.
Item
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Title
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The pricing of interest rate-dependent securities.
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Identifier
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AAI9000679
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identifier
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9000679
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Creator
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Cakici, Nusret.
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Contributor
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Adviser: Avner Wolf
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Date
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1989
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Language
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English
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Publisher
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City University of New York.
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Subject
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Economics, Finance
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Abstract
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The dissertation consists of four chapters. In the first chapter, we review the pricing of bonds and options on bonds using one factor model of the term structure of interest rates. In the second chapter, five different forms of the term structure of interest rates are used to determine bond prices, bond option prices and to evaluate optimal early exercise policies for bond options. Our numerical simulations suggest that the pricing of bonds as well as their options are quite sensitive to the specification of the behavior of interest rates. In particular, it is shown that the popular square root process for interest rates may be inappropriate for pricing bonds and options on bonds. Empirical results suggest all five interest rate specifications lead to bond price estimates which are consistently above the actual market prices. The magnitude of the overestimation increases with the bond's time to maturity. The conclusion of the second chapter is that these findings may be the result of either model misspecification or measurement errors in estimating inputs.;In the third chapter, three forms of the term structure of interest rates are utilized to estimate prices of bond futures and bond futures options. Numerical simulations suggest that bond futures prices and bond futures option prices are quite sensitive to underlying assumption about the behavior of interest rates. We apply Black's European option pricing model and its American version (Barone-Adesi and Whaley) to value bond futures options. Several estimates of implied standard deviation are compared. Average pricing errors are compared and systematic mispricing biases are analyzed. The empirical results can be summarized as follows. First, Black's model explains actual option prices much better than stochastic interest rate models. Second, there is no difference, in terms of predictive ability, between the European and American versions of Black's model. Third, the results indicate that market prices of these options deviate significantly from their corresponding model prices and it is also shown that mispricing errors are related to time to maturity and exercise price.;In the last chapter, we test Black's European futures option model and its American version using transaction data on T-Note and T-Bond futures options. The results presented here indicates that market prices of these options deviate significantly from their corresponding model prices and it is also shown that mispricing errors are related to time to maturity and exercise price. The hedging tests provided abnormal profits only in the case of call options. Further research is required in determining the adequacy of these models.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
