Browsing by Author "Silverman, Searle"
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- ItemOpen AccessThe cost of using misspecified models to exercise and hedge American options on coupon bearing bonds(2016) Welihockyj, Alexander; Silverman, Searle; McWalter, ThomasThis 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.