The sensitivity of interest rate options to monetary policy decisions: a regime-shift pricing approach
 
 
Description:  We look at whether monetary decisions constitute a significant macro-finance risk for interest rate options and related implied volatilities. We devise an option-pricing model based on the dynamics of the Federal Reserve’s target rate via a regime-shift approach modeled as discrete Markov chain capturing the timing of Federal Open Market Committee meetings. We find that the regime-shift risk is significantly priced and that the downward and stable regimes of the target rate, associated with a decline in real activity, display higher probabilities of occurrence under the risk-neutral measure. We also observe that implied volatilities display a counter-cyclical behavior.

This is joint work with Geneviève Gauthier and Simon Lalancette (HEC, Montréal). It has just been published online in the Journal of Future Markets.
Start Date:  2015-05-20
Start Time:   15:00
Speaker:  René Ferland (Université du Québec à Montréal, Canada)
Institution:  Université du Québec à Montréal
Place:  Room 2.4
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