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A term structure model for dividends and interest rates
Author(s) -
Filipović Damir,
Willems Sander
Publication year - 2020
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/mafi.12279
Subject(s) - dividend , futures contract , interest rate swap , economics , interest rate , financial economics , econometrics , affine term structure model , equity (law) , bond , yield curve , monetary economics , finance , political science , law
Abstract Over the last decade, dividends have become a standalone asset class instead of a mere side product of an equity investment. We introduce a framework based on polynomial jump‐diffusions to jointly price the term structures of dividends and interest rates. Prices for dividend futures, bonds, and the dividend paying stock are given in closed form. We present an efficient moment based approximation method for option pricing. In a calibration exercise we show that a parsimonious model specification has a good fit with Euribor interest rate swaps and swaptions, Euro Stoxx 50 Index dividend futures and dividend options, and Euro Stoxx 50 Index options.