Rational Models for Inflation-linked Derivatives

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Standard

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

Harvard

Dam, HT, Macrina, A, Skovmand, DG & Sloth, D 2020, 'Rational Models for Inflation-linked Derivatives', SIAM Journal on Financial Mathematics, bind 11, nr. 4, s. 974-1006. https://doi.org/10.1137/18M1235764

APA

Dam, H. T., Macrina, A., Skovmand, D. G., & Sloth, D. (2020). Rational Models for Inflation-linked Derivatives. SIAM Journal on Financial Mathematics, 11(4), 974-1006. https://doi.org/10.1137/18M1235764

Vancouver

Dam HT, Macrina A, Skovmand DG, Sloth D. Rational Models for Inflation-linked Derivatives. SIAM Journal on Financial Mathematics. 2020;11(4):974-1006. https://doi.org/10.1137/18M1235764

Author

Dam, Henrik Thybo ; Macrina, Andrea ; Skovmand, David Glavind ; Sloth, David. / Rational Models for Inflation-linked Derivatives. I: SIAM Journal on Financial Mathematics. 2020 ; Bind 11, Nr. 4. s. 974-1006.

Bibtex

@article{37a87e708bf146b8bab2526c5765988a,
title = "Rational Models for Inflation-linked Derivatives",
abstract = "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.",
author = "Dam, {Henrik Thybo} and Andrea Macrina and Skovmand, {David Glavind} and David Sloth",
year = "2020",
doi = "10.1137/18M1235764",
language = "English",
volume = "11",
pages = "974--1006",
journal = "SIAM Journal on Financial Mathematics",
issn = "1945-497X",
publisher = "Society for Industrial and Applied Mathematics",
number = "4",

}

RIS

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