Hostname: page-component-78c5997874-4rdpn Total loading time: 0 Render date: 2024-11-02T20:07:28.900Z Has data issue: false hasContentIssue false
  • English
  • Français

Testing the Heath-Jarrow-Morton/Ho-Lee Model of Interest Rate Contingent Claims Pricing

Published online by Cambridge University Press:  06 April 2009

Bjorn Flesaker
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper presents empirical tests of the constant volatility version of the Heath, Jarrow, and Morton model, which is also the continuous time limit of the Ho and Lee model. Using a generalized method of moments (GMM) test on three years of daily data for Eurodollar futures and futures options, the model can be rejected for most subperiods. Various biases in the fitted option prices relative to the market prices are documented through a regression study. The small sample properties and power of the GMM framework to this setting are also studied through simulations.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 28 , Issue 4 , December 1993 , pp. 483 - 495
Copyright
Copyright © School of Business Administration, University of Washington 1993

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (05 1973), 637–654.CrossRefGoogle Scholar
Bossaerts, P., and Hillion, P.. “Method of Moments Tests of Contingent Claims Asset Pricing Models.” Manuscript, Carnegie Mellon Univ. (1988).Google Scholar
Brenner, R. J. “An Empirical Examination of the Heath, Jarrow, Morton Term Structure Model.” Chapter 3, Unpubl. Doctoral Diss., Cornell Univ. (1989).Google Scholar
Cox, J. C.; Ingersoll, J. E.; and Ross, S. A.. “A Theory of the Term Structure of Interest Rates.” Econometrica, 53 (03 1985), 385–407.CrossRefGoogle Scholar
Flesaker, B. “Estimation and Testing of the Constant Volatility Heath, Jarrow, Morton Model of Interest Rate Contingent Claims Pricing.” Unpubl. Manuscript, Univ. of Illinois at Urbana-Champaign (1992).CrossRefGoogle Scholar
Flesaker, B. “Arbitrage Free Pricing of Interest Rate Futures and Forward Contracts.” Journal of Futures Markets, 13 (02 1993), 77–91.CrossRefGoogle Scholar
Hansen, L. P. “Large Sample Properties of the Generalized Method of Moments Estimators.” Econometrica, 50 (07 1982), 1029–1054.CrossRefGoogle Scholar
Heath, D.; Jarrow, R. A.; and Morton, A.. “Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation.” Econometrica, 60 (01 1992), 77–105.CrossRefGoogle Scholar
Heath, D.; Jarrow, R. A.; and Morton, A.. “Bond Pricing and the Term Structure of Interest Rates: The Binomial Approximation.” Journal of Financial and Quantitative Analysis, 25 (12 1990), 419–440.CrossRefGoogle Scholar
Ho, T. S. “Interest Rate Futures Options and Interest Rate Options.” Unpubl. Manuscript, New York Univ. (1985).Google Scholar
Ho, T. S., and Lee, S. B.. “Term Structure Movements and Pricing Interest Rate Contingent Claims.” Journal of Finance, 41 (12 1986), 1011–1029.CrossRefGoogle Scholar
Hull, J., and White, A.. “The Use of the Control Variate Technique in Option Pricing.” Journal of Financial and Quantitative Analysis, 23 (09 1988), 237–251.CrossRefGoogle Scholar
Pearson, N. D., and Sun, T.-S.. “A Test of the Cox, Ingersoll, Ross Model of the Term Structure of Interest Rates Using the Method of Maximum Likelihood.” Manuscript, MIT (1989).Google Scholar
Vasicek, O. “An Equilibrium Characterization of the Term Structure.” Journal of Financial Economics, 5 (11 1977), 177–188.CrossRefGoogle Scholar