Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments October 4, 2007 erstellt
Beschreibung:
This paper reexamines the issue of unspanned stochastic volatility (USV) in bond markets and the puzzle of the poor relative pricing between bonds and bond options. I make a distinction between the weak USV and the strong USV scenarios, and analyze the evidence for each of them. I argue that the poor bonds/options relative pricing in the extant literature is not necessarily evidence for the strong USV scenario, and show that a maximally flexible 2-factor quadratic-Gaussian model (a non-USV model) estimated without bond options data can capture much of the movement in bond option prices. Dropping the positive-definiteness requirement for nominal interest rates and adopting regularized estimations turn out to be important in obtaining sensible results