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On the Presence of Unspanned Volatility in European Interest Rate Options

Roberto Renò & Adamo Uboldi

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abstract In a recent paper, Collin-Dufresne and Goldstein (2002) show that the movements of the yield curve and of interest rate derivatives are mostly uncorrelated, advocating the presence of unspanned volatility. This letter shows that their results can be explained in the framework of a Gaussian HJM model with humped term-structure volatility. This implies that hedging interest rate derivatives with interest rate swaps is not ruled out.
   
type journal paper
   
keywords
   
language English
kind of paper journal article
date of appearance 16-8-2005
journal Applied Economic Letters
publisher Routledge (Abingdon)
ISSN 1350-4851
ISSN (online) 1466-4291
DOI 10.1080/1744654042000296880
volume of journal 1
number of issue 1
page(s) 15-18
review not reviewed
   
citation Renò, R., & Uboldi, A. (2005). On the Presence of Unspanned Volatility in European Interest Rate Options. Applied Economic Letters, 1(1), 15-18, DOI:10.1080/1744654042000296880.