The cost of using misspecified models to exercise and hedge American options on coupon bearing bonds

This dissertation investigates the cost of using single-factor models to exercise and hedge American options on South African coupon bearing bonds, when the simulated market term structure is driven by a two-factor model. Even if the single factor models are re-calibrated on a daily basis to the term structure, we find that the exercise and hedge strategies can be suboptimal and incur large losses. There is a vast body of research suggesting that real market term structures are in actual fact driven by multiple factors, so suboptimal losses can be largely reduced by simply employing a well-specified multi-factor model.

Grantor dc:publisher.institution

Division of Actuarial Science

Year dc:date.issued

2016

Author dc:creator

• Welihockyj, Alexander

Advisors dc:contributor.advisor

• Silverman, Searle
• McWalter, Thomas

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/11427/20532

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/20532