A comprehensive guide to the current theories and methodologies intrinsic to fixed–income securities Written by well–known experts from a cross–section of academia and finance, Handbook of Fixed–Income Securities features a compilation of the most up–to–date fixed–income securities techniques and methods. The book presents crucial topics of fixed–income in an accessible and logical format. Emphasizing empirical research and real–life applications, the book explores a wide range of topics from the risk and return of fixed–income investments, to the impact of monetary policy on interest rates, to the post–crisis new regulatory landscape. Well–organized to cover critical topics in fixed income, Handbook of Fixed–Income Securities is divided into eight main sections that feature: An introduction to fixed–income markets such as Treasury bonds, inflation–protected securities, money markets, mortgage–backed securities, and the basic analytics that characterize them Monetary policy and fixed–income markets, which highlight the recent empirical evidence on the central banks influence on interest rates, including the recent quantitative easing experiments Interest rate risk measurement and management with a special focus on the most recent techniques and methodologies for asset–liability management under regulatory constraints The predictability of bond returns with a critical discussion of the empirical evidence on time–varying bond risk premia, both in the U.S. and abroad, and its sources, such as liquidity and volatility Advanced topics, which focuses on the most recent research on term structure models and econometrics, the dynamics of bond illiquidity, and the puzzling dynamics of stocks and bonds Derivatives markets, which includes a detailed discussion of the new regulatory landscape after the financial crisis as well as an introduction to no–arbitrage derivatives pricing Further topics on derivatives pricing that covers modern valuation techniques, such as Monte Carlo simulations, volatility surfaces, and no–arbitrage pricing with regulatory constraints Corporate and sovereign bonds with a detailed discussion of the tools required to analyze default risk, the relevant empirical evidence, and a special focus on the recent sovereign crises A complete reference for practitioners in the fields of finance, business, applied statistics, econometrics, and engineering, Handbook of Fixed–Income Securities is also a useful supplementary textbook for graduate and MBA–level courses on fixed–income securities, risk management, volatility, equities, bonds, derivatives, and financial markets. INDICE: Preface xvii .Part I Fixed Income Markets .1 Fixed Income Markets: An Introduction 1 .1.1 Introduction 1 .1.2 U.S. Treasury Bills, Notes, and Bonds 7 .1.3 Interest Rates, Yields, and Discounting 8 .1.4 The Term Structure of Interest Rates 10 .1.4.1 The Economics of the Nominal Yield Curve 10 .1.4.2 The Expectations Hypothesis 16 .1.4.3 Forward Rates as Expectation of Future Interest Rates? 20 .1.4.4 Interpreting a Steepening of the Yield Curve 22 .1.5 Pricing Coupon Notes and Bonds 23 .1.5.1 Estimating the Zero–Coupon Discount Function 23 .1.5.2 Data and Bond Illiquidity 25 .1.6 Inflation–Protected Securities 27 .1.7 Floating Rate Notes 29 .1.8 Conclusion 31 .2 Money Market Instruments 35 .2.1 Overview of the Money Market 35 .2.2 U.S. Treasury Bills 37 .2.3 Commercial Paper 38 .2.3.1 General Facts About Commercial Paper 38 .2.3.2 Non–Asset Backed Commercial Paper 39 .2.3.3 Asset–Backed Commercial Paper 40 .2.4 Discount Window 42 .2.5 Eurodollars 43 .2.5.1 Eurodollar Futures 45 .2.6 Repurchase Agreements 45 .2.6.1 Types of Repos and Haircuts 45 .2.6.2 Basic Forms of Repo Collateral 47 .2.6.3 Repo Rates and Collateral Value Risks 48 .2.6.4 The Run on Repo During the Financial Crisis 49 .2.7 Interbank Loans 51 .2.7.1 Federal Funds 51 .2.7.2 LIBOR 54 .2.7.3 Overnight Index Swaps and LIBOR–OIS Spreads 55 .2.7.4 A Model of LIBOR–OIS Spreads 56 .2.8 Conclusion 59 .3 Inflation–Adjusted Bonds and the Inflation Risk Premium 61 .3.1 Inflation–Indexed Bonds 61 .3.1.1 Mechanics of TIPS 62 .3.1.2 Valuing an Inflation–Indexed Bond 63 .3.2 Inflation Derivatives 63 .3.2.1 Constructing a Synthetic Nominal Treasury Bond with Inflation Swaps 64 .3.3 No Arbitrage Pricing 64 .3.3.1 Zero–Coupon Bonds 64 .3.4 Inflation Risk Premium 65 .3.4.1 Determinants of the Inflation Risk Premium 67 .3.5 A look at the Data 68 .3.5.1 Break–even rates 68 .3.5.2 Inflation Swap Rates 69 .3.5.3 Inflation Risk Premium 74 .3.6 Conclusion 76 .3.7 Appendix 76 .3.7.1 Breeden–Lucas–Rubinstein example 76 .3.7.2 Disaster Risk 77 .3.8 Data Appendix 78 .4 Mortgage Related Securities 81 .4.1 Purpose of the Chapter 81 .4.2 Introduction to MRSs 83 .4.2.1 Mortgage and Securitization 83 .4.2.2 The cash flows of Mortgage Pools 84 .4.3 Valuation Overview 89 .4.3.1 OAS, OAD, and Negative Convexity 90 .4.3.2 Modeling prepayment and default 93 .4.4 Analyzing a MRS 97 .4.4.1 Modeling prepayment and default 97 .4.4.2 Freddie Mac s STACR 106 .4.4.3 Analyzing the STACR Series 2013–DN1 111 .4.5 Summary 115 .Part II Monetary Policy and Fixed Income Markets .5 Bond Markets and Monetary Policy 119 .5.1 Introduction 119 .5.2 High Frequency Identification of Monetary Policy Shocks 122 .5.2.1 Learning About Monetary Policy Surprises 123 .5.2.2 The Impact on Treasury Bond Yields 126 .5.2.3 The Timing of Expected Fed Interventions 128 .5.3 Target versus Path shocks 129 .5.3.1 The Economics of FOMC Meetings and Bond Yields 134 .5.4 Conclusions 142 .6 Bond Markets and Unconventional Monetary Policy 147 .6.1 Introduction 147 .6.2 Unconventional Policies: The Fed, ECB, and BoE 149 .6.2.1 Federal Reserve Operations 149 .6.2.2 Bank of England Operations 153 .6.2.3 European Central Bank Operations 154 .6.3 Unconventional Policies: A Theoretical Framework 161 .6.4 Unconventional Policies: The Empirical Evidence 166 .6.4.1 The Treasury Bond Market 166 .6.4.2 The MBS Market 180 .6.4.3 How Persistent is the Effect? 184 .6.5 Conclusions 185 .Part III Interest Rate Risk Management .7 Interest Rate Risk Management and ALM 191 .7.1 Introduction 191 .7.2 Literature Review 192 .7.3 Interest Rate Risk Measures 194 .7.3.1 Duration 194 .7.3.2 Convexity 195 .7.3.3 Key Rate Duration 198 .7.3.4 Principal Component Analysis and Factor Duration 199 .7.4 Application to Asset Liability Management 204 .7.4.1 Nature of Liabilities 204 .7.4.2 Cash Flow Matching 207 .7.4.3 Classic Immunization and Duration Matching 209 .7.4.4 Key Rate Duration Matching 214 .7.4.5 Factor Duration Matching 220 .7.5 Backtesting ALM Strategies 226 .7.6 Liability Hedging and Portfolio Construction 228 .7.7 Conclusions 231 .7.8 Appendix: The Implementation of Principal Component Analysis 233 .8 Optimal Asset Allocation in ALM 237 .8.1 Introduction 237 .8.2 Yield Smoothing 243 .8.3 ALM problem 245 .8.3.1 Return and Yield Dynamics 245 .8.3.2 Preferences 248 .8.3.3 Constraints 250 .8.3.4 Data description and estimation 251 .8.4 Method 252 .8.5 Single Period Portfolio Choice 254 .8.5.1 ALM with a VaR constraint 254 .8.5.2 ALM with AFCs 257 .8.6 Dynamic Portfolio Choice 262 .8.6.1 Welfare and portfolio implications of yield smoothing 262 .8.6.2 Hedging demands and regulatory constraints 264 .8.7 Conclusion 269 .8.8 Appendix: Return model parameter estimates 270 .8.9 Appendix: Benchmark Without Liabilities 270 .Part IV The Predictability of Bond Returns .9 International Bond Risk Premia 277 .9.1 Introduction 277 .9.2 Literature review 280 .9.3 Notation and international bond market data 282 .9.3.1 Notation 282 .9.3.2 International bond market data 282 .9.4 Unconditional risk premia 283 .9.4.1 A long–term perspective 284 .9.4.2 More recent evidence 287 .9.5 Conditional risk premia 289 .9.5.1 Local predictors of returns 290 .9.5.2 Global predictors of returns 296 .9.6 Understanding bond risk premia 302 .9.6.1 Links to economic growth 302 .9.6.2 State dependency 304 .9.7 Conclusion and outlook 306 .10 Return Predictability: Real Rates, Inflation, and Liquidity 313 .10.1 Introduction 313 .10.2 Brief Literature Review 315 .10.3 Bond Data and Definitions 317 .10.3.1 Bond Notation and Definitions 317 .10.3.2 Yield Data 318 .10.4 Real Nominal Liquidity Differential 319 .10.4.1 Estimation Strategy 322 .10.4.2 Data on Liquidity and Inflation Expectation Proxies 323 .10.4.3 Estimating Differential Liquidity 327 .10.5 Bond Excess Return Predictability 332 .10.5.1 Economic Significance of Bond Risk Premia 337 .10.6 Conclusion 338 .11 U.S. Treasury Market: The high–frequency evidence 345 .11.1 Introduction 345 .11.2 The U.S. Treasury markets during the financial crisis 347 .11.2.1 Yields 347 .11.2.2 Volatility 349 .11.2.3 Off–the–run/on–the–run yield spread 351 .11.2.4 Trading volume and price impact 351 .11.2.5 Fails 351 .11.2.6 Intra–day evidence on March 18, 2009 354 .11.2.7 Summary 355 .11.3 The reaction of bond prices and interest rates to macroeconomic news 356 .11.3.1 Level effects 356 .11.3.2 The impact of monetary policy 358 .11.3.3 Realized–volatility patterns 360 .11.3.4 Macro news and option–implied volatilities 361 .11.3.5 ARCH and GARCH effects 365 .11.3.6 Jumps 369 .11.3.7 Summary 373 .11.4 Market microstructure effects 374 .11.4.1 Microstructure effects in the cash market 375 .11.4.2 Joint microstructure effects in the cash market and futures markets 380 .11.4.3 Summary 381 .11.5 Bond risk premia 382 .11.5.1 Daily evidence 382 .11.5.2 Intra–day evidence 384 .11.5.3 Summary 385 .11.6 The impact of high–frequency trading 386 .11.6.1 The effects of HFT on liquidity, volatility, and risk premia 386 .11.6.2 Summary 388 .11.7 Conclusions 388 .Part V Advanced Topics on Term Structure Models and Their Estimation .12 Structural Affine Models 395 .12.1 Purpose and Structure of This Chapter 395 .12.2 Structural Models 396 .12.3 A Simple Taxonomy 397 .12.4 Why Do We Need No–Arbitrage Models After All? 399 .12.5 Affine Models and the Drivers of the Yield Curve 401 .12.5.1 Expectations 401 .12.5.2 Term (Risk) Premia 401 .12.5.3 Convexity 404 .12.6 Introducing No–Arbitrage 405 .12.7 Which Variables Should One Use? 406 .12.8 Risk Premia Implied by Affine Models with Constant Market Price of Risk 409 .12.9 Testable Predictions: Constant Market Price of Risk 411 .12.10What Do We Know About Excess Returns? 412 .12.11Understanding the Empirical Results on Term Premia 414 .12.12Enriching the First–Generation Affine Models 416 .12.13Latent Variables: The D Amico, Kim and Wei Model 417 .12.14From Linear Regressors to Affine Models: the ACMApproach 419 .12.15Affine Models Using Principal Components as Factors 421 .12.16The Predictions from the Modern Models 423 .12.17Conclusions 427 .12.17.1 Models As Enforcers of Parsimony and Builders of Confidence 428 .12.17.2 Models As Enforcers of Cross–Sectional Restrictions 429 .12.17.3 Models As Revealers of Forward–Looking Informations 430 .12.17.4 Models As Enhancers of Understanding 431 .13 The Econometrics of Fixed Income Markets 435 .13.1 Introduction 435 .13.2 Different Types of Term Structure Models 437 .13.2.1 Factor Models 437 .13.2.2 Observable Factors 438 .13.2.3 Latent Factors: Filtering vs. Indirect Observation 438 .13.2.4 Macroeconomic Models 439 .13.2.5 Affine Models 440 .13.2.6 Yield–based Models 441 .13.2.7 Forward–based Models 442 .13.3 Parametric Estimation Methods 443 .13.3.1 GMM 443 .13.3.2 Maximum Likelihood 444 .13.3.3 QML 445 .13.3.4 Efficient Method of Moments 446 .13.3.5 Estimation Bias in Mean Reversion Parameters 447 .13.4 Maximum Likelihood Estimation 447 .13.4.1 Observed State Variables 448 .13.4.2 Latent State Variables 448 .13.5 Constructing the Likelihood Function: Expansion of the Transition Density 452 .13.5.1 Reducibilty 453 .13.5.2 The Irreducible Case 455 .13.6 Concluding Remarks 457 .14 Recent Advances in Old Fixed–Income Topics 463 .14.1 Introduction 463 .14.2 Liquidity 465 .14.2.1 Bills, Notes and Bonds 465 .14.2.2 Market Liquidity and Short–Selling Costs 468 .14.2.3 Hedging Demand 470 .14.2.4 Risky Arbitrage 471 .14.2.5 Segmented Markets and Preferred Habitats 472 .14.2.6 Funding Risk 474 .14.2.7 Implication for Term Structure Models 477 .14.3 Learning 479 .14.3.1 Yield Survey Forecasts 479 .14.3.2 Affine Term Structure Models 482 .14.3.3 Spanning Survey Forecasts 487 .14.3.4 Adaptive Learning and Survey Forecasts 491 .14.3.5 Equilibrium models of the term structure 492 .14.4 Lower Bound 493 .14.4.1 Square–Root and Auto–Regressive Gamma Models 494 .14.4.2 Black (1995) Tobit 497 .14.4.3 No–Dominance Term Structure Models 499 .14.4.4 Recent Empirical Results 501 .14.5 Conclusion 504 .15 The Economics of the Comovement of Stocks and Bonds 513 .15.1 Introduction 513 .15.2 A Brief Literature Survey 514 .15.3 The Stock–Bond Covariance and Learning About Fundamentals 516 .15.3.1 Investors Beliefs About Composite Regimes 518 .15.3.2 Valuations and the Fed Model 520 .15.3.3 Explaining the Time Variation in the Stock–Bond .Covariance 521 .15.4 Beliefs from Surveys and from the Model 522 .15.5 Survey and Model Beliefs and the Stock–Bond Covariance 525 .15.6 Some International Evidence 528 .15.7 Summary 533 .Part VI Derivatives: Markets and Pricing .16 Interest Rate Derivatives: Market Activity and New Regulation 537 .16.1 Introduction 537 .16.2 Background on the New Derivatives Regulatory Framework 539 .16.2.1 Clearing 540 .16.2.2 Execution 543 .16.2.3 Reporting 544 .16.3 Exchange–Traded Derivatives 547 .16.3.1 Major Products 547 .16.3.2 Execution 548 .16.3.3 Clearing 549 .16.3.4 Market Activity 553 .16.4 Non–Cleared Swaps 555 .16.4.1 Major Products 555 .16.4.2 Execution 559 .16.4.3 Credit Risk Mitigation 564 .16.4.4 Market Activity 574 .16.5 Cleared Swaps 580 .16.5.1 Major Products 580 .16.5.2 Market Activity 580 .16.6 Comparative Market Activity Across Execution Venues 591 .16.6.1 OTC vs. Exchange–Traded Interest Rate Derivatives 591 .16.6.2 Bilateral vs. SEF Execution of OTC Interest Rate Derivatives 596 .16.7 Liquidity Fragmentation in Non–Dollar Swaps 601 .16.8 Prospects for the Future 606 .16.8.1 Cleared Swaps and Exchange–Traded Interest Rate Derivatives 608 .16.8.2 Swap Futures 609 .16.8.3 Non–Cleared Swaps and End Users 609 .16.9 Appendix: The New Regulatory Framework 611 .16.9.1 Classifications of Market Participants 612 .16.9.2 Clearing 615 .16.9.3 Execution 619 .16.9.4 Reporting 622 .16.9.5 Margin Requirements for Non–Cleared Swaps 623 .16.9.6 Capital Requirements for Non–Cleared Swaps 628 .16.9.7 Cross–Border and Extra–Territoriality Issues 632 .17 Risk–Neutral Pricing: Trees 649 .17.1 Introduction 649 .17.2 Binomial Trees 650 .17.2.1 One Step Binomial Trees 650 .17.2.2 The Market Price of Risk 655 .17.3 Risk–Neutral Pricing on Multi–Step Trees 657 .17.3.1 Calibration of Risk–Neutral Trees to the Yield Curve 658 .17.3.2 The Pricing of European Options 661 .17.3.3 The Pricing of American Options 668 .17.4 From Diffusion Models to Binomial Trees 670 .17.4.1 The Hull and White Model 674 .17.5 Trinomial Trees 676 .17.5.1 Calibration to the Yield Curve 678 .17.5.2 Pricing Bermudan contracts using the trinomial tree 682 .17.5.3 Calibration to the Volatility Curve 684 .18 Derivative Pricing Before and After the Crisis 687 .18.1 Introduction 687 .18.2 Forward Rate Agreements (FRA) 690 .18.2.1 Forward Rates 691 .18.2.2 Forward Rates after the Crisis 692 .18.2.3 A Simple Explanation for the Arbitrage 695 .18.3 Overnight Index Swaps (OIS) 700 .18.3.1 OIS Discount Curve 701 .18.4 LIBOR–based Swaps 701 .18.4.1 LIBOR Discount Curve with Single Curve Pricing 704 .18.5 The Crisis and the Double–Curve Pricing of LIBOR–based Swaps 705 .18.5.1 Extracting FRA Rates from Swap Quotes 708 .18.5.2 Extracting the Discount Curve from FRA Rates 708 .18.5.3 Summing Up 709 .18.6 The Pricing of LIBOR–based Interest Rate Options 710 .18.6.1 Black s Option Pricing Formula 710 .18.6.2 Caps and Floors before and after the Crisis 712 .18.6.3 Swaptions before and after the Crisis 714 .18.7 Conclusions 715 .Part VII Advanced Topics in Derivatives Pricing .19 Risk–Neutral Pricing: Monte Carlo Simulations 719 .19.1 Introduction 719 .19.2 Risk–Neutral Pricing 720 .19.2.1 Interest Rate Models 723 .19.2.2 The Market Price of Risk 724 .19.2.3 Valuation under P and under Q 725 .19.2.4 Multifactor Models 726 .19.3 Risk–Neutral Pricing: Monte Carlo Simulations 732 .19.3.1 Discretization of the Vasicek model 733 .19.3.2 Discretization of the Cox Ingersoll Ross model 734 .19.3.3 Interest Rate Modeling at the Zero Lower Bound 738 .19.4 Valuation by Monte Carlo Simulation 739 .19.4.1 Valuation of Securities with Payoff at Fixed Date 740 .19.4.2 MC Valuation of Callable Bonds 744 .19.4.3 MCValuation of securities with American or Bermudan exercise style 746 .19.5 Monte Carlo simulations in multifactor models 755 .19.5.1 Discretization procedure of the affine factor models 756 .19.5.2 MCsimulations for callable securities in multifactor models 757 .19.6 Conclusion 764 .20 Interest Rate Derivatives and Volatility 767 .20.1 Introduction 767 .20.2 Markets 768 .20.2.1 Market Size 768 .20.2.2 OTC IRD Trading and Volatility 769 .20.2.3 Exchange–Listed IRD Trading and Volatility 773 .20.2.4 Recent Developments in the IRD Market 773 .20.3 Dissecting the Instruments 775 .20.3.1 Government bonds 776 .20.3.2 Time deposits 778 .20.3.3 Forwards rate agreements and interest rate swaps 780 .20.3.4 Caps, floors and swaptions 782 .20.4 Evaluation Paradigms 783 .20.4.1 Models of the short–term rate 784 .20.4.2 No arbitrage models 786 .20.4.3 Volatility 792 .20.5 Pricing and trading volatility 797 .20.5.1 Standard volatility trading practice 798 .20.5.2 An introduction to interest rate variance swaps 799 .20.5.3 Pricing volatility in three markets 811 .20.5.4 Current forward looking indexes of IRV 820 .20.5.5 Products on IRV indexes 824 .20.6 Conclusions 828 .20.7 Appendix 829 .21 Nonlinear Valuation under Margin and Funding Costs 839 .21.1 Introduction 840 .21.2 Collateralized Credit and Funding Valuation Adjustments 844 .21.2.1 Trading under Collateralization and Close–out Netting 846 .21.2.2 Trading under Funding Risk 850 .21.3 General Pricing Equation under Credit, Collateral and Funding 855 .21.3.1 Discrete–time Solution 856 .21.3.2 Continuous–time Solution 858 .21.4 Numerical Results: Extending the Black–Scholes Analysis 862 .21.4.1 Monte Carlo Algorithm 862 .21.4.2 Market, Credit, and Funding Risk Specification 864 .21.4.3 Preliminary Analysis without Credit Risk and with Symmetric Funding Rates 866 .21.4.4 Full Analysis with Credit Risk, Collateral and Funding Costs 868 .21.4.5 Non–linearity Valuation Adjustment 873 .21.5 Extensions 875 .21.6 Conclusions: Bilateral Prices or Nonlinear Values? 877 .Part VIII Corporate and Sovereign Bonds .22 Corporate bonds 883 .22.1 Introduction 883 .22.2 Market and data 884 .22.2.1 Data on bond characteristics 884 .22.2.2 Data on market prices 885 .22.2.3 Understanding market data from TRACE 887 .22.3 A very simple model 889 .22.3.1 The credit spread arising from expected loss 890 .22.3.2 Adding a risk premium 891 .22.4 Structural models 892 .22.4.1 Merton s model with beta 892 .22.4.2 Bankruptcy costs 896 .22.4.3 Early default 898 .22.5 Reduced–form models 899 .22.5.1 A useful approximation 902 .22.5.2 Closed–form solutions 904 .22.6 Risk premia in intensity models 906 .22.7 Dealing with portfolios 909 .22.8 Illiquidity as a source of spreads 910 .22.9 Some additional readings 912 .22.10Conclusion 913 .23 Sovereign Credit Risk 917 .23.1 Introduction 917 .23.2 Literature Review 920 .23.3 Modeling Sovereign Default 922 .23.3.1 Risk–Neutral Pricing 922 .23.3.2 Pricing Sovereign Credit Default Swaps 927 .23.3.3 Pricing in a Log–Normal Model 929 .23.4 Credit Risk Premia 930 .23.5 Estimating Intensity Models 931 .23.6 Application to Emerging Markets 933 .23.6.1 Credit Markets of Emerging Economies 936 .23.6.2 Credit Risk Premia in Emerging Credit Markets 938 .23.7 Application to the European Debt Crisis 941 .23.7.1 Credit Risk Premia in the Eurozone 947 .23.8 Conclusion 950 .23.9 Appendix: No Arbitrage Pricing 950 .23.9.1 The risk–neutral default intensity 954 .Index 959
- ISBN: 978-1-118-70919-1
- Editorial: Wiley–Blackwell
- Encuadernacion: Cartoné
- Páginas: 632
- Fecha Publicación: 22/04/2016
- Nº Volúmenes: 1
- Idioma: Inglés