Jackknifing bond option prices

• 成果类型: Article
• 署名作者: Phillips, PCB; Yu, J
• 署名单位: Singapore Management University; University of Auckland; University of York - UK; Yale University
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhi018
• 发表日期: 2005
• 页码: 707
• 关键词: maximum-likelihood-estimation; CONTINUOUS-TIME MODELS; MEDIAN-UNBIASED ESTIMATION; term structure; moments; derivatives; volatility; DYNAMICS; MARKET; rates

摘要

Prices of interest rate derivative securities depend crucially on the mean reversion parameters of the underlying diffusions. These parameters are subject to estimation bias when standard methods are used. The estimation bias can be substantial even in very large samples and much more serious than the discretization bias, and it translates into a bias in pricing bond options and other derivative securities that is important in practical work. This article proposes a very general and computationally inexpensive method of bias reduction that is based on Quenouille's (1956; Biometrika, 43, 353-360) jackknife. We show how the method can be applied directly to the options price itself as well as the coefficients in the models. We investigate its performance in a Monte Carlo study. Empirical applications to U.S. dollar swap rates highlight the differences between bond and option prices implied by the jackknife procedure and those implied by the standard approach. These differences are large and suggest that bias reduction in pricing options is important in practical applications.