The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions Joost

@inproceedings{Driessen2000ThePO,
  title={The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions Joost},
  author={A Driessen and Pieter Klaassen and Bertrand Melenberg},
  year={2000}
}
In this paper we analyze the pricing and hedging of caps and swaptions using term structure models. Cap prices mainly depend on variances of forward interest rates, whereas swaption prices also depend on the correlations between these forward rates. We therefore compare onefactor models, that imply perfectly correlated interest rates, with multi-factor models, using US data on cap and swaption prices for 1995 until 1999. The caps and swaptions data contain wide ranges of both option maturities… CONTINUE READING
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