Rational Models for Inflation-linked Derivatives
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Rational Models for Inflation-linked Derivatives. / Dam, Henrik Thybo; Macrina, Andrea; Skovmand, David Glavind; Sloth, David.
I: SIAM Journal on Financial Mathematics, Bind 11, Nr. 4, 2020, s. 974-1006.Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › fagfællebedømt
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TY - JOUR
T1 - Rational Models for Inflation-linked Derivatives
AU - Dam, Henrik Thybo
AU - Macrina, Andrea
AU - Skovmand, David Glavind
AU - Sloth, David
PY - 2020
Y1 - 2020
N2 - We construct models for the pricing and risk management of inflation-linked derivatives. The models are rational in the sense that linear payoffs written on the consumer price index have prices that are rational functions of the state variables. The nominal pricing kernel is constructed in a multiplicative manner that allows for closed-form pricing of vanilla inflation products suchlike zero-coupon swaps, year-on-year swaps, caps and floors, and the exotic limited-price-index swap. We study the conditions necessary for the multiplicative nominal pricing kernel to give rise to short rate models for the nominal interest rate process. The proposed class of pricing kernel models retains the attractive features of a nominal multicurve interest rate model, such as closed-form pricing of nominal swaptions, and it isolates the so-called inflation convexity-adjustment term arising from the covariance between the underlying stochastic drivers. We conclude with examples of how the model can be calibrated to EUR data.
AB - We construct models for the pricing and risk management of inflation-linked derivatives. The models are rational in the sense that linear payoffs written on the consumer price index have prices that are rational functions of the state variables. The nominal pricing kernel is constructed in a multiplicative manner that allows for closed-form pricing of vanilla inflation products suchlike zero-coupon swaps, year-on-year swaps, caps and floors, and the exotic limited-price-index swap. We study the conditions necessary for the multiplicative nominal pricing kernel to give rise to short rate models for the nominal interest rate process. The proposed class of pricing kernel models retains the attractive features of a nominal multicurve interest rate model, such as closed-form pricing of nominal swaptions, and it isolates the so-called inflation convexity-adjustment term arising from the covariance between the underlying stochastic drivers. We conclude with examples of how the model can be calibrated to EUR data.
U2 - 10.1137/18M1235764
DO - 10.1137/18M1235764
M3 - Journal article
VL - 11
SP - 974
EP - 1006
JO - SIAM Journal on Financial Mathematics
JF - SIAM Journal on Financial Mathematics
SN - 1945-497X
IS - 4
ER -
ID: 244236598