Identifying volatility risk premia from fixed income Asian options

Resumo

Fixed income options are frequently adopted by companies to hedge interest rate risk. Their payoff dependence on the cumulative short-term rate makes them particularly informative about interest rate volatility risk. Based on a joint dataset of bonds and Asian interest rate options, we study the interrelations between bond and volatility risk premia in a major emerging fixed income market. We propose a dynamic term structure model that generates an incomplete market compatible with a preliminary empirical analysis of the dataset. Approximation formulas for at-the-money Asian option prices avoid the use of computationally intensive Fourier transform methods, allowing for an efficient implementation of the model. The model generates a bond risk premium strongly correlated with a widely accepted emerging market benchmark index (EMBI-Global), and a negative volatility risk premium, consistent with the use of Asian options as insurance in this market. (C) 2008 Elsevier B.V. All rights reserved.

Ficha do documento

Tipo

Artigo científico

Ano

2009

Instituição

Elsevier Science Bv

Fonte

Repositório da FGV

Idioma

Inglês

Acesso

Acesso restrito

DOI

10.1016/j.jbankfin.2008.11.011

Identificador

oai:repositorio.fgv.br:10438/23123

Palavras-chave

Asian optionsRisk premiumStochastic volatilityIncomplete marketsFinançasRiscoAnálise estocástica