Heath–Jarrow–Morton models with jumps

Alfeus, Mesias (2015-03)

Thesis (MSc)--Stellenbosch University, 2015.

Thesis

ENGLISH ABSTRACT : The standard-Heath–Jarrow–Morton (HJM) framework is well-known for its application to pricing and hedging interest rate derivatives. This study implemented the extended HJM framework introduced by Eberlein and Raible (1999), in which a Brownian motion (BM) is replaced by a wide class of processes with jumps. In particular, the HJM driven by the generalised hyperbolic processes was studied. This approach was motivated by empirical evidence proving that models driven by a Brownian motion have several shortcomings, such as inability to incorporate jumps and leptokurticity into the price dynamics. Non-homogeneous Lévy processes and the change of measure techniques necessary for simplification and derivation of pricing formulae were also investigated. For robustness in numerical valuation, several transform methods were investigated and compared in terms of speed and accuracy. The models were calibrated to liquid South African data (ATM) interest rate caps using two methods of optimisation, namely the simulated annealing and secant-Levenberg–Marquardt methods. Two numerical valuation approaches had been implemented in this study, the COS method and the fractional fast Fourier transform (FrFT), and were compared to the existing methods in the context. Our numerical results showed that these two methods are quite efficient and very competitive. We have chose the COS method for calibration due to its rapidly speed and we have suggested a suitable approach for truncating the integration range to address the problems it has with short-maturity options. Our calibration results provided a nearly perfect fit, such that it was difficult to decide which model has a better fit to the current market state. Finally, all the implementations were done in MATLAB and the codes included in appendices.

AFRIKAANSE OPSOMMING : Die standaard-Heath–Jarrow–Morton-raamwerk (kortom die HJM-raamwerk) is daarvoor bekend dat dit op die prysbepaling en verskansing van afgeleide finansiële instrumente vir rentekoerse toegepas kan word. Hierdie studie het die uitgebreide HJM-raamwerk geïmplementeer wat deur Eberlein en Raible (1999) bekendgestel is en waarin ’n Brown-beweging deur ’n breë klas prosesse met spronge vervang word. In die besonder is die HJM wat deur veralgemeende hiperboliese prosesse gedryf word ondersoek. Hierdie benadering is gemotiveer deur empiriese bewyse dat modelle wat deur ’n Brown-beweging gedryf word verskeie tekortkominge het, soos die onvermoë om spronge en leptokurtose in prysdinamika te inkorporeer. Nie-homogene Lévy-prosesse en die maatveranderingstegnieke wat vir die vereenvoudiging en afleiding van prysbepalingsformules nodig is, is ook ondersoek. Vir robuustheid in numeriese waardasie is verskeie transformmetodes ondersoek en ten opsigte van spoed en akkuraatheid vergelyk. Die modelle is vir likiede Suid-Afrikaanse data vir boperke van rentekoerse sonder intrinsieke waarde gekalibreer deur twee optimiseringsmetodes te gebruik, naamlik die gesimuleerde uitgloeimetode en die sekans-Levenberg–Marquardt-metode. Twee benaderings tot numeriese waardasie is in hierdie studie gebruik, naamlik die kosinusmetode en die fraksionele vinnige Fourier-transform, en met bestaande metodes in die konteks vergelyk. Die numeriese resultate het getoon dat hierdie twee metodes redelik doeltreffend en uiters mededingend is. Ons het op grond van die motiveringspoed van die kosinus-metode daardie metode vir kalibrering gekies en ’n geskikte benadering tot die trunkering van die integrasiereeks voorgestel ten einde die probleem ten opsigte van opsies met kort uitkeringstermyne op te los. Die kalibreringsresultate het ’n byna perfekte passing gelewer, sodat dit moeilik was om te besluit watter model die huidige marksituasie die beste pas. Ten slotte is alle implementerings in MATLAB gedoen en die kodes in bylaes ingesluit.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/96783
This item appears in the following collections: