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Linear bonds valuation with interest rate models: Does it work?

Published online by Cambridge University Press:  17 August 2016

Rudy De Winne
Rudy De Winne*
Affiliation:
Facultés Universitaires Catholiques de Mons (FUCaM)
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Summary

This paper compares the implications of different interest rate models for valuing the so-called OLOs (Belgian coupon bonds). The prices of these bonds implied by some well-known one-factor models are compared to the actual prices observed on the market. Our finding suggest that these interest rate models are unsatisfactory, especially in valuing longer term bonds.

Résumé

Résumé

Dans cet article, nous procédons à l'évaluation d'obligations linéaires (OLOs) émises par l'État belge. Les modèles d'évaluation dynamique les plus connus sont utilisés et les prix théoriques obtenus sont comparés aux cours observés sur le marché secondaire de manière à préciser les performances des modèles étudiés. Notre travail montre que ces modèles sont très imprécis, particulièrement pour les obligations de maturité plus longue.

Keywords

E4G1E4G1
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 64 , Issue 2 , 1998 , pp. 213 - 223
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1998 

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Footnotes

*

This paper is based on my dissertation at the Université Catholique de Louvain. I am grateful for valuable suggestions of many colleagues, both at my institution and others. I wish to thank especially Alain François-Heude (Lille II) for his help. The paper also benefits from the useful comments of two anonymous referees. Any remaining errors are my responsibility.

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