Journal of Computational Finance

Risk.net

Pricing of interest rate contingent claims: implementing a simulation approach

Kristian R. Miltersen

ABSTRACT

This paper is an empirical study of the Heath-Jarrow-Morton model using time-stamped transactions data of screen-traded Danish bond and option prices. The paper shows how to implement a simulation approach to price contingent claims written on purely interest rate-dependent securities fulfilling the Heath-Jarrow-Morton model. This method implies simulation of solutions of stochastic differential equations since the pricing model is too complicated to give closed-form pricing formulas. Therefore, parameters of the volatility of the Heath-Jarrow-Morton model is estimated using simulated moments estimation. Estimated prices of the model are mostly within the bid-ask spread.

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an indvidual account here: