Yield-Curve Modeling

January 8, 2018

(This article was originally published at No Hesitations, and syndicated at StatsBlogs.)

Happy New Year to all!

Riccardo Rebonato's Bond Pricing and Yield-Curve Modeling: A Structural Approach will soon appear from Cambridge University Press. It's very well done -- a fine blend of  theory, empirics, market sense, and good prose.  And not least, endearing humility, well-captured by a memorable sentence from the acknowledgements: "My eight-year-old son has forgiven me, I hope, for not playing with him as much as I would have otherwise; perhaps he has been so understanding because he has had a chance to build a few thousand paper planes with the earlier drafts of this book."

TOC below.  Pre-order here


Acknowledgements page ix
Symbols and Abbreviations xi

Part I The Foundations
1 What This Book Is About 3
2 Definitions, Notation and a Few Mathematical Results 24
3 Links among Models, Monetary Policy and the Macroeconomy 49
4 Bonds: Their Risks and Their Compensations 63
5 The Risk Factors in Action 81
6 Principal Components: Theory 98
7 Principal Components: Empirical Results 108

Part II The Building Blocks: A First Look
8 Expectations 137
9 Convexity: A First Look 147
10 A Preview: A First Look at the Vasicek Model 160

Part III The Conditions of No-Arbitrage
11 No-Arbitrage in Discrete Time 185
12 No-Arbitrage in Continuous Time 196
13 No-Arbitrage with State Price Deflators 206
14 No-Arbitrage Conditions for Real Bonds 224
15 The Links with an Economics-Based Description of Rates 241

Part IV Solving the Models
16 Solving Affine Models: The Vasicek Case 263
17 First Extensions 285
18 A General Pricing Framework 299
19 The Shadow Rate: Dealing with a Near-Zero Lower Bound 329

Part V The Value of Convexity
20 The Value of Convexity 351
21 A Model-Independent Approach to Valuing Convexity 371
22 Convexity: Empirical Results 391

Part VI Excess Returns
23 Excess Returns: Setting the Scene 415
24 Risk Premia, the Market Price of Risk and Expected Excess Returns 431
25 Excess Returns: Empirical Results 449
26 Excess Returns: The Recent Literature – I 473
27 Excess Returns: The Recent Literature – II 497
28 Why Is the Slope a Good Predictor? 527
29 The Spanning Problem Revisited 547

Part VII What the Models Tell Us
30 The Doubly Mean-Reverting Vasicek Model 559
31 Real Yields, Nominal Yields and Inflation: The D’Amico–Kim–Wei Model 575
32 From Snapshots to Structural Models: The Diebold–Rudebusch Approach 602
33 Principal Components as State Variables of Affine Models: The PCA Affine Approach 618
34 Generalizations: The Adrian–Crump–Moench Model 663
35 An Affine, Stochastic-Market-Price-of-Risk Model 688

36 Conclusions 714

Bibliography 725

index 000

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