The dynamics of sovereign yields over swap rates in the Eurozone market

AbstractThis paper performs specification analysis on the term structure of variance swap rates on the S&P 500 index and studies the optimal investment decision on the variance swaps and the stock index. The analysis identifies 2 stochastic variance risk factors, which govern the short and long end of the variance swap term structure variation, respectively. The highly negative estimate for the market price of variance risk makes it optimal for an investor to take short positions in a short-term variance swap contract, long positions in a long-term variance swap contract, and short positions in the stock index.

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Credit‐default swap rates and equity volatility: a nonlinear relationship

The Journal of Risk Finance ◽

10.1108/15265940610688946 ◽

2006 ◽

Vol 7 (4) ◽

pp. 348-371 ◽

Cited By ~ 14

Author(s):

Fathi Abid ◽

Nader Naifar

Keyword(s):

Credit Default Swap ◽

Nonlinear Relationship ◽

Credit Default ◽

Default Swap ◽

Swap Rates

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ARBITRAGE-FREE INTERPOLATION OF THE SWAP CURVE

International Journal of Theoretical and Applied Finance ◽

10.1142/s0219024909005543 ◽

2009 ◽

Vol 12 (07) ◽

pp. 969-1005 ◽

Cited By ~ 3

Author(s):

MARK H. A. DAVIS ◽

VICENTE MATAIX-PASTOR

Keyword(s):

Closed Form ◽

Yield Curve ◽

Interpolation Method ◽

Continuous Process ◽

Closed Form Solution ◽

Form Solution ◽

Market Model ◽

Short Term ◽

Free Interpolation ◽

Swap Rates

We suggest an arbitrage free interpolation method for pricing zero-coupon bonds of arbitrary maturities from a model of the market data that typically underlies the swap curve; that is short term, future and swap rates. This is done first within the context of the Libor or the swap market model. We do so by introducing an independent stochastic process which plays the role of a short term yield, in which case we obtain an approximate closed-form solution to the term structure while preserving a stochastic implied short rate. This will be discontinuous but it can be turned into a continuous process (however at the expense of closed-form solutions to bond prices). We then relax the assumption of a complete set of initial swap rates and look at the more realistic case where the initial data consists of fewer swap rates than tenor dates and show that a particular interpolation of the missing swaps in the tenor structure will determine the volatility of the resulting interpolated swaps. We give conditions under which the problem can be solved in closed-form therefore providing a consistent arbitrage-free method for yield curve generation.

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