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Empirically Effective Bond Pricing Model and Analysis on Term Structures of Implied Interest Rates in Financial Crisis

Content Provider	Springer Nature Link
Author	Kariya, Takeaki Wang, Jingsui Wang, Zhu Doi, Eiichi Yamamura, Yoshiro
Copyright Year	2011
Abstract	In his book (1993) Kariya proposed a government bond (GB) pricing model that simultaneously values individual fixed-coupon (non-defaultable) bonds of different coupon rates and maturities via a discount function approach, and Kariya and Tsuda (Financ Eng Japanese Mark 1:1–20, 1994) verified its empirical effectiveness of the model as a pricing model for Japanese Government bonds (JGBs) though the empirical setting was limited to a simple case. In this paper we first clarify the theoretical relation between our stochastic discount function approach and the spot rate or forward rate approach in mathematical finance. Then we make a comprehensive empirical study on the capacity of the model in view of its pricing capability for individual GBs with different attributes and in view of its capacity of describing the movements of term structures of interest rates that JGBs imply as yield curves. Based on various tests of validity in a GLS (Generalized Least Squares) framework we propose a specific formulation with a polynomial of order 6 for the mean discount function that depends on maturity and coupon as attributes and a specific covariance structure. It is shown that even in the middle of the Financial Crisis, the cross-sectional model we propose is shown to be very effective for simultaneously pricing all the existing JGBs and deriving and describing zero yields.
Starting Page	259
Ending Page	292
Page Count	34
File Format	PDF
ISSN	13872834
Journal	Asia-Pacific Financial Markets
Volume Number	19
Issue Number	3
e-ISSN	15736946
Language	English
Publisher	Springer Japan
Publisher Date	2011-11-11
Publisher Place	Japan
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Cross-sectional bond pricing model Term structure of interest rates Subprime shock Financial crisis Swap rate Japanese government bond Generalized least squares Forward rate Discount function Econometrics International Economics Economic Theory Financial Economics Finance/Investment/Banking
Content Type	Text
Resource Type	Article
Subject	Finance

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