Bond Pricing and Yield Curve Modeling
A Structural Approach

Rebonato gives an authoritative, clear, and up-to-date explanation of the cutting-edge innovations in affine modeling for government bonds.

Riccardo Rebonato (Author)

9781107165854, Cambridge University Press

Hardback, published 7 June 2018

776 pages
23.5 x 16.3 x 2 cm, 1.28 kg

'Rebonato takes readers on a thought-provoking journey that will elevate their thinking about term-structure modeling. In this journey, they will likely become increasingly familiar and comfortable with some simple mathematical techniques that are new to them.' Enterprising Investor, CFA Institute (www.blogs.cfainstitute.org)

In this book, well-known expert Riccardo Rebonato provides the theoretical foundations (no-arbitrage, convexity, expectations, risk premia) needed for the affine modeling of the government bond markets. He presents and critically discusses the wealth of empirical findings that have appeared in the literature of the last decade, and introduces the 'structural' models that are used by central banks, institutional investors, sovereign wealth funds, academics, and advanced practitioners to model the yield curve, to answer policy questions, to estimate the magnitude of the risk premium, to gauge market expectations, and to assess investment opportunities. Rebonato weaves precise theory with up-to-date empirical evidence to build, with the minimum mathematical sophistication required for the task, a critical understanding of what drives the government bond market.

Part I. The Foundations: 1. What this book is about
2. Definitions, notation, and a few mathematical results
3. Links between models, monetary policy, and the macroeconomy
4. Bonds: their risks and their compensations
5. The risk factors in action
6. Principal components: theory
7. Principal components: empirical results
Part II. The Building Blocks – A First Look: 8. A preview – a first look at the Vasicek model
9. Expectations
10. Convexity – a first look
Part III. No Arbitrage: 11. No arbitrage in discrete time
12. No arbitrage in continuous time
13. No arbitrage with state price deflators
14. No-arbitrage conditions for real bonds
15. The links with an economics-based description of rates
Part IV. Solving the Models: 16. Solving affine models: the Vasicek case
17. First extensions
18. A general pricing framework
19. The shadow rate: dealing with a near-zero lower bound
Part V. The Value of Convexity: 20. The value of convexity
21. A model-independent approach to valuing convexity
22. Convexity: empirical results
Part VI. Excess Returns: 23. Excess returns: setting the scene
24. Risk premia, the market price of risk, and expected excess returns
25. Excess returns: empirical results
26. Excess returns: the recent literature – I
27. Excess returns: the recent literature – II
28. Why is the slope a good predictor?
29. The spanning problem revisited
Part VII. What the Models Tell Us: 30. The doubly-mean-reverting Vasicek model
31. Real yields, nominal yields, and inflation: the D'Amico–Kim–Wei model
32. From snapshots to structural models: the Diebold and Rudebush approach
33. Principal components as state variables of affine models: the PCA affine approach
34. Generalizations: the ACM model
35. An affine, stochastic-market-price-of-risk model
36. Conclusions
37. References.

Subject Areas: Finance [KFF], Finance & accounting [KF], Econometrics [KCH], Monetary economics [KCBM]