Imperial College London
Alternate

ProfessorRamaCont

Faculty of Natural Sciences, Department of Mathematics

Visiting Professor
 
 
 
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Contact

 

+44 (0)20 7594 0802r.cont Website

 
 
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Location

 

806Weeks BuildingSouth Kensington Campus

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Summary

 

Publications

Citation

BibTex format

@article{Bouchaud:1999:10.1080/135048699334546,
author = {Bouchaud, J-P and Sagna, N and Cont, R and El-Karoui, N and Potters, M},
doi = {10.1080/135048699334546},
journal = {Applied Mathematical Finance},
pages = {209--232},
title = {Phenomenology of the Interest Rate Curve},
url = {http://dx.doi.org/10.1080/135048699334546},
volume = {6},
year = {1999}
}
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RIS format (EndNote, RefMan)

TY  - JOUR
AB  - This paper contains a phenomenological description of the whole U.S. forwardrate curve (FRC), based on an data in the period 1990-1996. We find that theaverage FRC (measured from the spot rate) grows as the square-root of thematurity, with a prefactor which is comparable to the spot rate volatility.This suggests that forward rate market prices include a risk premium,comparable to the probable changes of the spot rate between now and maturity,which can be understood as a `Value-at-Risk' type of pricing. Theinstantaneous FRC however departs form a simple square-root law. The distortionis maximum around one year, and reflects the market anticipation of a localtrend on the spot rate. This anticipated trend is shown to be calibrated on thepast behaviour of the spot itself. We show that this is consistent with thevolatility `hump' around one year found by several authors (and which weconfirm). Finally, the number of independent components needed to interpretmost of the FRC fluctuations is found to be small. We rationalize this byshowing that the dynamical evolution of the FRC contains a stabilizing secondderivative (line tension) term, which tends to suppress short scale distortionsof the FRC. This shape dependent term could lead, in principle, to arbitrage.However, this arbitrage cannot be implemented in practice because oftransaction costs. We suggest that the presence of transaction costs (or othermarket `imperfections') is crucial for model building, for a much wider classof models becomes eligible to represent reality.
AU  - Bouchaud,J-P
AU  - Sagna,N
AU  - Cont,R
AU  - El-Karoui,N
AU  - Potters,M
DO  - 10.1080/135048699334546
EP  - 232
PY  - 1999///
SP  - 209
TI  - Phenomenology of the Interest Rate Curve
T2  - Applied Mathematical Finance
UR  - http://dx.doi.org/10.1080/135048699334546
UR  - http://arxiv.org/abs/cond-mat/9712164v1
UR  - http://www.tandfonline.com/doi/abs/10.1080/135048699334546
VL  - 6
ER  -
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