Throwing away a billion dollars: the cost of suboptimal exercise strategies in the swaptions market

• 成果类型: Article
• 署名作者: Longstaff, FA; Santa-Clara, P; Schwartz, ES
• 署名单位: University of California System; University of California Los Angeles
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/S0304-405X(01)00073-3
• 发表日期: 2001
• 页码: 39-66
• 关键词: American option; exercise strategy; term structure; Model Misspecification

摘要

This paper studies the costs of applying single-factor exercise strategies to American swap options when the term structure is actually driven by multiple factors. Using a multifactor string market model of the term structure, we find that even when single-factor models are recalibrated to match the market at every exercise date, the exercise strategies they imply can be suboptimal. Based on estimates of notional amounts outstanding, the total present value costs of following single-factor strategies could be several billion dollars. These results illustrate the importance of using well-specified term structure models. (C) 2001 Published by Elsevier Science S.A.