Do Bonds Span the Fixed Income Markets?
Author InfoPierre Collin-Dufresne (Carnegie Mellon University,) Robert S. Goldstein (Washington University, St. Louis) Abstract Most term structure models assume bond markets are complete, that is, that all fixed income derivatives can be perfectly replicated using solely bonds. How ever, we find that, in practice, swap rates have limited explanatory power for returns on at-the-money straddles-portfolios mainly exposed to volatility risk. We term this empirical feature “unspanned stochastic volatility” (USV). While USV can be captured within an HJM framework, we demonstrate that bivariate models cannot exhibit USV. We determine necessary and sufficient conditions for trivariate Markov affine systems to exhibit USV. For such USV models, bonds alone may not be sufficient to identify all parameters. Rather, derivatives are needed. Copyright The American Finance Association 2002. Download InfoTo download: If you experience problems downloading a file, check if you have the proper applicati
Related Questions
- Do you anticipate strong ongoing demand for the long bond? How will the bonds comeback shape the fixed income markets, particularly with regard to duration?
- What is the credit quality of the bonds available through the Fixed Income Trade Desk?
- Who offers the best in Bonds & Fixed Income Investing: T. Rowe Price or CPS Notes?
