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E-raamat: Price of Fixed Income Market Volatility

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  • Formaat: PDF+DRM
  • Sari: Springer Finance
  • Ilmumisaeg: 11-Jan-2016
  • Kirjastus: Springer International Publishing AG
  • Keel: eng
  • ISBN-13: 9783319265230
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Price of Fixed Income Market VolatilitySuurem pilt
  • Formaat: PDF+DRM
  • Sari: Springer Finance
  • Ilmumisaeg: 11-Jan-2016
  • Kirjastus: Springer International Publishing AG
  • Keel: eng
  • ISBN-13: 9783319265230
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Fixed income volatility and equity volatility evolve heterogeneously over time, co-moving disproportionately during periods of global imbalances and each reacting to events of different nature. While the methodology for options-based "model-free" pricing of equity volatility has been known for some time, little is known about analogous methodologies for pricing various fixed income volatilities.





This book fills this gap and provides a unified evaluation framework of fixed income volatility while dealing with disparate markets such as interest-rate swaps, government bonds, time-deposits and credit. It develops model-free, forward looking indexes of fixed-income volatility that match different quoting conventions across various markets, and uncovers subtle yet important pitfalls arising from naïve superimpositions of the standard equity volatility methodology when pricing various fixed income volatilities.
1 Introduction
1(18)
1.1 Background
1(3)
1.2 From Realized to Expected Fixed Income Volatility
4(4)
1.3 The Right Numeraire and Volatility Pricing
8(8)
1.3.1 Market Risk and Model-Free Pricing
9(2)
1.3.2 Getting the Right Volatility with the Right Model
11(5)
1.4 Scope and Plan of the Book
16(3)
2 Variance Contracts: Fixed Income Security Design
19(40)
2.1 Introduction
19(2)
2.2 Market Numeraires and Volatilities
21(1)
2.3 Interest Rate Variance Swaps
22(9)
2.3.1 Contracts and Model-Free Pricing
22(4)
2.3.2 Log Versus Quadratic Contracts
26(2)
2.3.3 Hedging
28(2)
2.3.4 Constant Gamma Exposure
30(1)
2.4 Implied Volatility Indexes
31(4)
2.4.1 Model-Free Indexes
31(1)
2.4.2 Comparisons to Model-Based Log-Normal and Normal Implied Volatility
32(2)
2.4.3 Index Decompositions
34(1)
2.5 Implementing Basis Point Variance Swaps
35(5)
2.5.1 Incremental Versus Point-to-Point Realized Variance
35(3)
2.5.2 Volatility Risk Premiums
38(2)
2.6 Skew Shifts and the Dynamics of Volatility Indexes
40(7)
2.6.1 Truncations
41(2)
2.6.2 Numerical Experiments and Interpretation of Actual Index Behavior
43(4)
2.7 Jumps
47(12)
Appendix A Appendix on Security Design and Volatility Indexing
49(1)
A.1 Proof of Proposition 2.2
49(2)
A.2 A Stochastic Multiplier Beyond the Market NumEraire
51(1)
A.3 Vega and Gamma in Gaussian Markets
51(3)
A.4 Proof of Proposition 2.3
54(1)
A.5 Approximating Indexes
55(2)
A.6 Jumps
57(2)
3 Interest Rate Swaps
59(66)
3.1 Introduction
59(2)
3.2 Risks Regarding Interest Rate Swaps
61(5)
3.2.1 The Annuity Factor
61(2)
3.2.2 Option-Based Volatility Trading
63(3)
3.3 Interest Rate Swap Variance Contracts
66(12)
3.3.1 Risks and Spanning Derivatives
67(1)
3.3.2 Contract Designs
68(2)
3.3.3 Pricing
70(1)
3.3.4 Marking to Market
71(1)
3.3.5 Hedging
72(4)
3.3.6 Links to Constant Maturity Swaps
76(1)
3.3.7 Physical Swap Settlement and Variance Contracts
76(1)
3.3.8 Multiple Curves
77(1)
3.4 Trading Strategies
78(5)
3.4.1 Spot Trading Through IRV Swaps
78(3)
3.4.2 Spot Trading Through Standardized IRV Swaps
81(1)
3.4.3 Forward Trading
82(1)
3.5 Interest Rate Swap Volatility Indexes
83(4)
3.5.1 Basis Point Volatility Index
83(1)
3.5.2 Percentage Volatility Index
84(1)
3.5.3 Experiments
84(3)
3.5.4 Jumps
87(1)
3.6 Swap Versus Equity Variance Contracts and Indexes
87(2)
3.7 Index Implementation
89(36)
3.7.1 A Numerical Example
90(3)
3.7.2 Historical Performance
93(4)
Appendix B Appendix on Interest Rate Swap Markets
97(1)
B.1 P&L of Option-Based Volatility Trading
97(6)
B.2 Spanning IRS Variance Contracts
103(4)
B.3 Hedging
107(4)
B.4 Constant Maturity Swaps
111(2)
B.5 The Contract and Index in the Vasicek Market
113(12)
4 Government Bonds and Time-Deposits
125(86)
4.1 Introduction
125(4)
4.2 Government Bonds
129(28)
4.2.1 Pricing Spot Volatility
129(5)
4.2.2 Basis Assets
134(2)
4.2.3 Percentage Price Volatility
136(2)
4.2.4 Basis Point Price Volatility
138(1)
4.2.5 Marking to Market
139(1)
4.2.6 Replication
139(2)
4.2.7 Forward Price Adjustments
141(1)
4.2.8 Model-Free Measures of Basis Point Yield Volatility
142(3)
4.2.9 Certainty Equivalent Bond Prices as Expectations of Forward Prices
145(3)
4.2.10 Early Exercise and Futures Corrections
148(5)
4.2.11 Implementation Example
153(4)
4.2.12 Jumps
157(1)
4.3 Time Deposits
157(13)
4.3.1 The Underlying Risks
157(1)
4.3.2 Variance Contracts and Volatility Indexes
158(2)
4.3.3 Yield Volatility
160(1)
4.3.4 American Future Corrections
161(4)
4.3.5 Implementation Example
165(3)
4.3.6 LIBOR Variance Contracts and Volatility Indexes
168(2)
4.4 Maturity Mismatch
170(15)
4.4.1 Government Bonds
170(6)
4.4.2 Time Deposits
176(6)
4.4.3 Alternative Characterizations of Variance Contracts and Indexes
182(2)
4.4.4 Tilting the Variance Payoff
184(1)
4.5 Index Design with Heterogeneous Market Data
185(26)
4.5.1 Sandwich Combinations
186(2)
4.5.2 Rolling Indexes
188(1)
Appendix C Appendix on Government Bonds and Time Deposit Markets
189(1)
C.1 The Equity VIX with Stochastic Interest Rates
189(2)
C.2 Naive Model-Free Methodology and Bias in Vasicek's Market
191(2)
C.3 Marking to Market
193(1)
C.4 Replication of Variance Swaps
193(2)
C.5 Estimates Based on Forward Price Approximations
195(2)
C.6 Certainty Equivalence, and Existence of Basis Point Yield Volatility
197(2)
C.7 Illustrations with a Stochastic Volatility Model
199(3)
C.8 The Future Price in Vasicek's Model
202(1)
C.9 Future and Forward LIBOR Options in Vasicek's Model
202(4)
C.10 The Impact of Early Exercise Premiums and Maturity Mismatch
206(5)
5 Credit
211(36)
5.1 Introduction
211(2)
5.2 Existing Credit Trading Practices
213(5)
5.2.1 Assumptions
214(1)
5.2.2 CDS Indexes
214(1)
5.2.3 CDS Index Options
215(3)
5.3 Credit Variance Contracts
218(7)
5.3.1 Percentage
218(2)
5.3.2 Basis Point
220(1)
5.3.3 Marking to Market
221(4)
5.4 Credit Volatility Indexes
225(5)
5.4.1 Definitions
225(1)
5.4.2 Forward Premium Adjustments
226(1)
5.4.3 Differences with Respect to Other Fixed Income Volatility Gauges
226(1)
5.4.4 Implementation Example
227(3)
5.4.5 Index Design Through Option Cycles
230(1)
5.5 Post "Big-Bang" Conventions and Index Adjustments
230(17)
5.5.1 Index Values Under Constant Hazard Rates
231(1)
5.5.2 Forward Positions
232(1)
5.5.3 Option Payoffs and Evaluation
233(3)
5.5.4 Index Corrections
236(1)
Appendix D Appendix on Credit Markets
237(1)
D.1 Preliminary Facts Concerning CDS Indexes
237(1)
D.2 Spanning Credit Variance Contracts
238(4)
D.3 Hedging
242(5)
References 247
Antonio Mele holds a Senior Chair at the Swiss Finance Institute, and is a full Professor of Finance at the University of Lugano, after having been a tenured faculty at the London School of Economics & Political Science for a decade. He is also a Research Fellow for the Financial Economics program at the Centre for Economic Policy Research (CEPR) in London. He holds a PhD in Economics from the University of Paris.



His academic expertise spans a variety of fields in financial economics, pertaining to capital market volatility, interest rates and credit markets, macro-finance, capital markets and business cycles, and information in securities markets. His research has been published by top journals in Finance and Economics such as the Journal of Financial Economics, the Review of Economic Studies, the Review of Financial Studies, and the Journal of Monetary Economics.

His work outside academia includes developingfixed income volatility indexes for Chicago Board Options Exchange. He is the co-inventor of the CBOE Interest Rate Swap Volatility Index (CBOE-SRVX) - the first standardized volatility measure in the interest-rate swap market, designed to standardize and simplify swap-rate volatility trading much in the spirit of the CBOE-VIX® index in the equity market.

Yoshiki Obayashi is a managing director at Applied Academics LLC in New York, specialized in developing and commercializing ideas emanating from a growing think-tank of academic researchers selected for their work's relevance to practice in the finance industry. His most recent projects range from running systematic trading strategies for funds to developing fixed income volatility indexes for Chicago Board Options Exchange.

























Yoshiki Obayashi previously managed US and Asian credit portfolios for a proprietary fixed-income trading group at an investment bank. He holds a PhD in Finance and Economics from Columbia Business School.
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