Asset Pricing: Modeling and Estimation: Kellerhals, B. Philipp: 9783540208532: Book: Business & Economics: eCampus.com

The modern field of asset pricing asks for sound pricing models grounded on the theory of financial economics as well as for accurate estimation techniques when it comes to empirical inferences of the specified model. This book provides a canonical framework that shows how to bridge the gap between the continuous-time pricing practice in financial engineering and the capital market data inevitably only available at discrete-time intervals. Starting with a comprehensive treatment of the particular stochastic modeling and econometric estimation framework, the main parts of the book cover applications to risky assets traded on the markets for funds, fixed-income products and electricity derivatives. The second edition newly incorporates the financial modeling chapter which elaborates on the vital PDE- and EMM-approaches. The reorganized and improved text further integrates the latest research contributions in the three covered application fields.

This updated second edition provides a framework that shows how to bridge the gap between the continuous-time pricing practice in financial engineering and the capital market data from discrete-time intervals. Starting with a comprehensive treatment of the particular stochastic modeling and econometric estimation framework, the main part of the book covers applications to risky assets traded on the markets for funds, fixed-income products and electricity derivatives. The second edition includes a new chapter on financial modeling which discusses vital PDE- and EMM-approaches. The reorganized and improved text further integrates the latest research contributions in the three covered application fields.

Part I Asset Pricing Framework

1 Financial Modeling

(18)

1.1 Continuous-Time Stochastics

(6)

1.1.1 Stochastic Processes and Brownian Motion

(3)

1.1.2 Martingales, Ito Calculus, and Changes of Measure

(3)

1.2 Arbitrage Pricing in Continuous Time

(12)

1.2.1 PDE Approach

(6)

1.2.2 EMM Approach

(6)

2 Estimation Principles

(22)

2.1 State Space Notation

(3)

2.2 Filtering Algorithms

(11)

2.2.1 Filtering Objective

(1)

2.2.2 Optimal Estimator

(5)

2.2.3 Filter Recursions

(2)

2.2.4 Extended Kalman Filtering

(2)

2.3 Parameter Estimation

(8)

Part II Pricing Equities

3 Introduction and Survey

(6)

3.1 Opening Remarks

(1)

3.2 Closed-End Funds: Survey and Hypotheses

(5)

4 Valuation Model

(10)

4.1 Characteristics of Closed-End Funds

(4)

4.2 Economic Foundation

(3)

4.3 Pricing Closed-End Fund Shares

(3)

5 First Empirical Results

(16)

5.1 Sample Data

(5)

5.2 Implemented Model

(1)

5.3 State Space Form

(2)

5.4 Closed-End Fund Analysis

(8)

6 Implications for Investment Strategies

(10)

6.1 Testing the Forecasting Power

(4)

6.1.1 Setup of Forecasting Study

(2)

6.1.2 Evidence on Forecasting Quality

(2)

6.2 Implementing Trading Rules

(10)

6.2.1 Experimental Design

(2)

6.2.2 Test Results on Trading Strategies

(4)

7 Summary and Conclusions

(4)

Part III Pricing Fixed-Income Securites

8 Introduction and Survey

(8)

8.1 Overview

(1)

8.2 Bond Prices and Interest Rates

(3)

8.3 Dynamic Term Structure Models

(4)

9 Term Structure Model

(8)

9.1 Modeling an Incomplete Market

(1)

9.2 Motivation for a Stochastic Risk Premium

(3)

9.3 Economic Model

101

(4)

10 Initial Characteristic Results

105

(1)

10.1 Valuing Discount Bonds

105

(1)

10.2 Term Structures of Interest Rates and Volatilities

112

(15)

10.2.1 Spot and Forward Rate Curves

112

(1)

10.2.2 Term Structure of Volatilities

113

(2)

10.3 Analysis of Limiting Cases

115

(1)

10.3.1 Reducing to an Ornstein-Uhlenbeck Process

115

(2)

10.3.2 Examining the Asymptotic Behavior

117

(2)

10.4 Possible Shapes of the Term Structures

119

(1)

10.4.1 Influences of the State Variables

119

(2)

10.4.2 Choosing the Model Parameters

121

(6)

11 Risk Management and Derivatives Pricing

127

(1)

11.1 Management of Interest Rate Risk

127

(1)

11.2 Pricing Interest Rate Derivatives

129

(14)

11.2.1 Bond Options

130

(8)

11.2.2 Swap Contracts

138

(2)

11.2.3 Interest Rate Caps and Floors

140

(3)

12 Calibration to Standard Instruments

143

(1)

12.1 Estimation Techniques for Term Structure Models

143

(1)

12.2 Discrete Time Distribution of the State Variables

146

(1)

12.3 US Treasury Securities

149

(20)

12.3.1 Data Analysis

149

(6)

12.3.2 Parameter Estimation

155

(5)

12.3.3 Analysis of the State Variables

160

(3)

12.4 Other Liquid Markets

163

(1)

12.4.1 Appropriate Filtering Algorithm

164

(1)

12.4.2 Sample Data and Estimation Results

165

(4)

13 Summary and Conclusions

169

(4)

Part IV Pricing Electricity Forwards

14 Introduction and Survey

173

(1)

14.1 Overview

173

(1)

14.2 Commodity Futures Markets

173

(1)

14.3 Pricing Commodity Futures

176

(1)

14.4 Asset Pricing in Electricity Markets

181

(6)

15 Electricity Pricing Model

187

(1)

15.1 Model Assumptions and Risk-Neutral Pricing

187

(1)

15.2 Valuation of Electricity Forwards

190

(5)

16 Empirical Inference

195

(1)

16.1 Estimation Model

195

(20)

16.1.1 Distribution of the State Variables

196

(3)

16.1.2 State Space Formulation and Kalman Filter Setup

199

(4)

16.2 Data Analysis and Estimation Results

203

(12)

17 Summary and Conclusions

215

(2)

List of Symbols and Notation

217

(4)

List of Tables

221

(2)

List of Figures

223

(2)

References

225

(16)

Index

241


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