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Interest Rate Modelling

Interest Rate Modelling

Hardback Wiley Financial Engineering

By (author) Jessica James, By (author) Nick Webber

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  • Publisher: John Wiley & Sons Ltd
  • Format: Hardback | 672 pages
  • Dimensions: 155mm x 231mm x 41mm | 1,066g
  • Publication date: 29 June 2000
  • Publication City/Country: Chichester
  • ISBN 10: 0471975230
  • ISBN 13: 9780471975236
  • Illustrations note: Ill.
  • Sales rank: 1,557,892

Product description

This book provides a comprehensive resource on all the main aspects of valuing and hedging interest rate products. A series of introductory chapters reviews the theoretical background, pointing out the problems in using na?ve valuation and implementation techniques. There follows a full analysis of interest rate models including major categories, such as affine, HJM and market models, and in addition, lesser well known types that include Consol, random field and jump-augmented models. Implementation methods are discussed in depth including the latest developments in the use of finite difference, lattice and Monte Carlo methods and their particular application to the valuation of interest rate derivatives. Containing previously unpublished material. Interest Rate Modelling is a key reference work both for practitioners developing and implementing models for real and for academics teaching and researching in the field. Interest Rate Modelling is an encyclopedic treatment of interest rates and their related financial derivatives. It combines advanced theory with extensive and down-to-earth data analysis in a way which is truly unique. For practitioners, students and scholars in the field, this impressive wok will be the standard reference for years to come.", Professor Tomas Bjork, , Stockholm School of Economics# "...an excellent book. I am particularly pleased by its breadth and range of topics...the reader is provided with an informative and readable exposition.", Dr Farshid Jamshidian, , NetAnalytic# "I particularly like the strong emphasis on the practicalities and calibration of interest rate models. This book will be invaluable as a comprehensive reference to students, researchers, and practitioners.", Professor Francis Longstaff, , The Anderson School at UCLA#" This is a carefully written, scholarly but fascinating presentation of the field of Interest Rate Modelling. It combines the best of two worlds: the rigour expected from finance in acamedia with the relevance expected from finance in practice. James and Webber are truly masters of their market since this book is surely a must-buy for both researchers and practitioners. If only all finance books were written with this care and attention to detail." , Dr Neil Johnson, , Clarendon Laboratory, Oxford# "Today, interest rates are key economic instruments. This is a mammoth treatise and must surely rank as one of the most comprehensive available on the topic. Anyone interested in modelling or simulating the behaviour of interest rates, be they practitioner, economist, mathematician or new entrant to the subject, will find within a wealth of pertinent material.", Professor Peter Richmond, , Trinity College Dublin#

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Author information

JESSICA JAMES is Head of Research for Bank One's Strategic Risk Management group, based in the UK. Jessica started life as a physicist at Manchester University and completed her DPhil in Theoretical Atomic and Nuclear Physics at Christ Church, Oxford, under Professor Sandars. After a year as a college lecturer at Trinity, Oxford, she began work at he First National Bank of Chicago, now Bank One, where she still works. She is well known as a speaker on the conference circuit, lecturing on a variety of topics such as VaR, capital allocation, credit derivatives and interest rate modelling, and ahs published articles on various aspects of financial modelling. NICK WEBBER is a lecturer in Finance at Warwick Business School. Prior to his academic career, Nick has had extensive experience in the industrial and commercial world in operational research and computing. After obtaining a PhD in Theoretical Physics from Imperial College he began research into financial options. His main area of research centres on interest rate modelling and computational finance. He ahs taught practitioner and academic course for many years, chiefly on options and interest rates.

Review quote

"Interest Rate Modelling is an encyclopedic treatment of interest rates and their related financial derivatives. It combines advanced theory with extensive and down-to-earth data analysis in a way which is truly unique. For practitioners, students and scholars in the field, this impressive wok will be the standard reference for years to come.," Professor Tomas Bjork,, Stockholm School of Economics#."..an excellent book. I am particularly pleased by its breadth and range of topics...the reader is provided with an informative and readable exposition.," Dr Farshid Jamshidian,, NetAnalytic#"I particularly like the strong emphasis on the practicalities and calibration of interest rate models. This book will be invaluable as a comprehensive reference to students, researchers, and practitioners.," Professor Francis Longstaff,, The Anderson School at UCLA#"This is a carefully written, scholarly but fascinating presentation of the field of Interest Rate Modelling. It combines the best of two worlds: the rigour expected from finance in acamedia with the relevance expected from finance in practice. James and Webber are truly masters of their market since this book is surely a must-buy for both researchers and practitioners. If only all finance books were written with this care and attention to detail.," Dr Neil Johnson,, Clarendon Laboratory, Oxford#"Today, interest rates are key economic instruments. This is a mammoth treatise and must surely rank as one of the most comprehensive available on the topic. Anyone interested in modelling or simulating the behaviour of interest rates, be they practitioner, economist, mathematician or new entrant to the subject, will find within a wealth of pertinent material.," Professor Peter Richmond,, Trinity College Dublin#

Back cover copy

Back Cover ( this section should include endorsements also) As interest rate markets continue to innovate and expand it is becoming increasingly important to remain up-to-date with the latest practical and theoretical developments. This book covers the latest developments in full, with descriptions and implementation techniques for all the major classes of interest rate models - both those actively used in practice as well as theoretical models still 'waiting in the wings'. Interest rate models, implementation methods and estimation issues are discussed at length by the authors as are important new developments such as kernel estimation techniques, economic based models, implied pricing methods and models on manifolds. Providing balanced coverage of both the practical use of models and the theory that underlies them, Interest Rate Modelling adopts an implementation orientation throughout making it an ideal resource for both practitioners and researchers. Back Flap Jessica James Jessica James is Head of Research for Bank One's Strategic Risk Management group, based in the UK. Jessica started life as a physicist at Manchester University and completed her D Phil in Theoretical Atomic and Nuclear Physics at Christ Church, Oxford, under Professor Sandars. After a year as a college lecturer at Trinity, Oxford, she began work at the First National Bank of Chicago, now Bank One, where she still works. She is well known as a speaker on the conference circuit, lecturing on a variety of topics such as VaR, capital allocation, credit derivatives and interest rate modelling, and has published articles on various aspects of financial modelling. Nick Webber Nick Webber is a lecturer in Finance at Warwick Business School. Prior to his academic career, Nick had extensive experience in the industrial and commercial world in operational research and computing. After obtaining a PhD in Theoretical Physics from Imperial College he began research into financial options. His main area of research centres on interest rate modelling and computational finance. He has taught practitioner and academic courses for many years, chiefly on options and interest rates. Front Flap Interest Rate Modelling provides a comprehensive resource on all the main aspects of valuing and hedging interest rate products. A series of introductory chapters reviews the theoretical background, pointing out the problems in using na?ve valuation and implementation techniques. There follows a full analysis of interest rate models including major categories, such as Affine, HJM and Market models, and in addition, lesser well known types that include Consol, Random field and Jump-augmented Models. Implementation methods are discussed in depth including the latest developments in the use of finite difference, Lattice and Monte Carlo methods and their particular application to the valuation of interest rate derivatives. Containing previously unpublished material, Interest Rate Modelling is a key reference work both for practitioners developing and implementing models for real and for academics teaching and researching in the field.

Flap copy

Interest Rate Modelling provides a comprehensive resource on all the main aspects of valuing and hedging interest rate products. A series of introductory chapters reviews the theoretical background, pointing out the problems in using nave valuation and implementation techniques. There follow as full analysis of interest rate models including major categories, such as affine, HJM and market models, and in addition, lesser will know types that include Consol, random field and jump-augmented models. Implementation methods are discussed in depth including the latest developments in the use of finite difference, lattice and Monte Carlo methods and their particular application ot the valuation of interest rate derivatives. Containing previously unpublished material, Interest Rate Modelling is a key reference work both for practitioners developing and implementation models for real and for academics teaching and researching in the field.

Table of contents

Part 1: Introduction to interest rate modelling 1. Introduction to interest rates 1.1 Interest rate behaviour 1.2 Basic concepts 1.3 Interest rate markets 1.4 Historical and current data 1.5 Uses of interest rate models 1.6 Conclusion 2. Interest rates in history 2.1 Interest rates in monetary history 2.2 Characteristics of interest rate behaviour 3. Introduction to interest rate modelling 3.1 Yield curve basics 3.2 Describing interest rate processes 3.3 Introducton to interest rate models 3.4 Categories of interest rate model 3.5 The role of the short rate 4. Interest rate models: theory 4.1 Summary of valuation 4.2 A theoretical market framework 4.3 Fundamentals of pricing 4.4 valuing by change of numeraire 4.5 Derivatives in the extended Vasicek model 5. Basic modelling tools 5.1 Introduction to valuation 5.2 Introduction to estimation 5.3 Statistical tests 5.4 Yield curve stripping 5.5 The convexity adjustment 6. Densities and distributions 6.1 The density function 6.2 Kernel methods 6.3 Boundary behaviour 6.4 Interest rate models at extreme values of interest rates 6.5 Tail distributions Part II Interest rate models 7. Affine models 7.1 Affine term structure models 7.2 Interpreting the state variables 7.3 Types of affine model 7.4 Examples of one-factor affine models 7.5 Examples of n-factor affine models 7.6 A general framework for affine models 8. Market models and the Heath, Jarrow and Morton framework 8.1 Introduction to the Heath, Jarrow and Morton model 8.2 Volatility functions in HJM 8.3 Market models 8.4 General market models 9. Other interest rate models 9.1 Consol models 9.2 Price kernet models 9.3 Positive interest rate models 9.4 Non-linear models 10. General formulations of interest rate models 10.1 Jump processes 10.2 Random field models 10.3 A general model 10.4 Jump models 11. Economic models 11.1 Economics and interest rates 11.2 An economically motivated financial model of interest rates 11.3 An IS-LM based model 11.4 IS-LM, hyperinflation and extended Vasicek 11.5 The general equilibrium framework 11.6 Interpreting the price kernel Part III Valuation methods 12. Finite difference methods 12.1 The Feynman-Kac Equation 12.2 Discretising the PDE 12.3 Simplifying the PDE 12.4 Explicit methods 12.5 Implicit methods 12.6 The Crank-Nicolson method 12.7 Comparison of methods 12.8 Implicit boundary conditions 12.9 Fitting to an initial term structure 12.10 Finite difference methods in N dimensions 12.11 Operator splitting 12.12 A two-dimensional PDE 12.13 Solving a PDDE 13. Valuation: the Monte Carlo method 13.1 The basic Monte Carlo method 13.2 Speed-up methods 13.3 Sampling issues 13.4 Simulation methods for HJM models 14. Lattice methods 14.1 Introduction to lattice methods 14.2 Issues in constructing a lattice 14.3 Examples of lattice methods 14.4 Calibration to market prices 14.5 The explicit finite difference method 14.6 Lattices and the Monte Carlo method 14.7 Non-recombining lattices 14.8 Conclusions Part IV Calibration and estimation 15. Modelling the yield curve 15.1 Stripping the yield curve 15.2 Fitting using parameterised curves 15.3 Fitting the yield curve using splines 15.4 Nelson and Siegel curves 15.5 Comparison of families of curves 15.6 Kernel methods of yield curve estimations 15.7 LP and regression methods 16. Principal components analysis 16.1 Volatility structures 16.2 Identifying empirical volatility factors 16.3 Calibrating whole yield curve methods 16.4 Processes on manifolds 16.5 Analysis of dynamical systems 16.6 Conclusions 17. Estimation methods: GMM and ML 17.1 GMM estimation 17.2 Implementation issues 17.3 The efficient method of moments (EMM) 17.4 Maximum likelihood methods 17.5 Hierarchy of procedures 18. Further estimation methods 18.1 Introduction 18.2 Filtering approaches to estimation 18.3 The extended Kalman Filter 18.4 GARCH models 18.5 Extensions of GARCH 18.6 Interest rate models and GARCH 18.7 Artificial neural nets (ANNs) 19. Interest rates and implied pricing 19.1 Problems with interest rate models 19.2 Key relationships 19.3 The interest rate case 19.4 The implied pricing method 19.5 Regularisation functions 19.6 Patching tails onto pricing densities Afterword Notation Glossary of mathematical, market and model terms References Author Index Subject Index