Pricing caps and floors with the extended CIR model

Mannolini, Antonio; Mari, Carlo; Renò, Roberto

doi:10.1002/ijfe.369

Cited by 4 publications

(3 citation statements)

References 27 publications

(29 reference statements)

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“…It can also be noted that the standard errors are all less that 4%. According to [7], this is a good indication that the calibration procedure was successful. Table 4 below also shows the descriptive statistics after simulating the data with the estimated parameters.…”

Section: Parameter Estimationmentioning

confidence: 85%

“…Even though the CIR model is widely preferred and used, it does not always describe interest rates movements in the observed market. The CIR model does not always provide satisfactory pricing results and does not always account for the shapes of term structure observed in the bond markets [7]. Therefore, over the years, a number of extensions of the CIR model have been constructed.…”

Section: Introductionmentioning

confidence: 99%

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Pricing interest rate caps and floors under the Pearson-Sun interest rate model

Abubakari¹,

Ngare²,

Mung’atu³

2018

ams

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Interest rate derivatives are largely used to manage interest rate risk. For this reason, the accuracy of their pricing is very important as mispricing can result in huge financial losses. In this study, the Pearson-Sun model, an extension of the CIR model, was used to price interest rate caps and floors. In the pricing process, the prices of zero-coupon bonds and European options on zero-coupon bonds were derived. These were then used to obtain the prices of caps and floors. The parameters of the Pearson-Sun model were estimated using maximum likelihood method on a daily term structure time series data. The results of the study showed that the CIR model is rejected in favour of the Pearson-Sun model. This implies that it would provide a better pricing accuracy as 1 Corresponding author 976 Abubakari Abdul Ghaniyyu, Philip Ngare and Joseph Mung'atu compared to the CIR model and would provide better prices to interest rate derivatives. The prices of caps and floors were simulated using the estimated parameters under the Pearson-Sun model. Mathematics Subject Classification: 91G20, 91G30

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Section: Parameter Estimationmentioning

confidence: 85%

Section: Introductionmentioning

confidence: 99%

Pricing interest rate caps and floors under the Pearson-Sun interest rate model

Abubakari¹,

Ngare²,

Mung’atu³

2018

ams

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“…This subject was brought up among others by Jagannathan at al. (2004), which applied multidimensional CIR models to caps and swaptions pricing, Tamba (2006), which used Hull-White diffusion model to Bermudian swaption pricing, and Mannolini, Mari, Renò (2008), which priced caps and floors by extended CIR models.…”

Section: Introductionmentioning

confidence: 99%

Forecasting Financial Processes by Using Diffusion Models

Płuciennik

2010

DEM

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Time series forecasting is one of the most important issues in the financial econometrics. In the face of growing interest in models with continuous time, as well as rapid development of methods of their estimation, we try to use the diffusion models to modeling and forecasting time series from various financial markets. We use Monte-Carlo-based method, introduced by Cziraky and Kucherenko (2008). Received forecasts are confronted with those determined with the commonly applied parametrical time series models.

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