ABSTRACT

In the previous chapter, two models within the class of endogenous term structure of interest rate models were estimated by means of a time series analysis. Based on the Amsterdam InterBank Offered Rate for different maturities, the constant variance of interest rates specification of the Vasicek (1977) model was not rejected in favor of the heteroscedastic variance specification implied by the model of Cox, Ingersoll and Ross (CIR) (1985) for maturities of up to three months. Given the estimations of the structural parameters of these models, option prices were also calculated to assess the impact of the results of the time series analysis on long-maturity volatilities. Although this latter analysis is not theoretically completely justified and some additional assumptions have to be made, it turned out that, over the sample period, option values based on the CIR model are more sensitive to the value of the instantaneous spot rate than are those option values based on the Vasicek model.