*Essential reference guide including research papers on building yield curve models and valuing interest rate derivatives *Fundamental papers on the Ho-Lee, Heath-Jarrow-Morton and Cox-Ross-Rubinstein models *Comprehensive information of interest rate models from 1978 to 1996
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Book Description
Editorial Reviews
Review
"A welcome contribution to this rapidly developing and important field" Lane Hughston's collection of key papers on term structure and interest rate derivative models is a welcome contribution to this rapidly developing and important field. Probably more than any other, the interest rate sub-field of the contingent claims literature has seen fundamental developments take place in both the traditional academic and practitioner communities. (Of course, some of the "practitioners" - including the editor of this volume - are distinguished academics in their own right.) For this reason the literature tends to be published in a wide variety of outlets and some key papers are therefore rather inaccessible. So it is valuable to have some of the most important contributions together in one book. The book has 23 papers, most of them previously published. The first - by the editor - is an introduction to the field and to some of the most commonly used mathematical methods. The remaining papers are divided into three sections: option pricing fundamentals, dynamic arbitrage models and the Heath-Jarrow-Morton family. The second section contains several classics, including Vasicek's original paper, the term structure paper by Cox, Ingersoll & Ross, and papers on pricing interest rate derivatives by Hull & White and Black, Derman & Toy. It is also good to see three excellent papers in this section by Jamshidian, many of whose articles are hard to find. The third section includes Heath, Jarrow & Morton's Econometrica article, the well-known paper by Geman, El Karoui & Rochet on change of measure, and a number of well known but unpublished papers, including the lognormal model by Brace, Gatarek & Musiela. The choice of papers seems excellent on the whole, but I did wonder about the role of the first section, which includes the original Black-Scholes paper on option pricing and Cox, Ross & Rubinstein's exposition of the binomial model. It is true that this early theory is a prerequisite for understanding the later material but these papers cannot represent the clearest accounts of these ideas available today for newcomers to the subject. Books such as Duffie's Dynamic Asset Pricing Theory or, at a simpler level, Hull's Options, Futures and Other Derivative Securities, would be better. Rather than these papers on basic material, I would have preferred some editorial linking material, explaining why particular papers were included and an account of their contribution. Finally, in looking at this collection I was struck by the dearth of empirical work: a feature of the field, not of this particular collection. (Only two empirical papers are included: by Brennan & Schwartz and Rogers & Zane.) This is a pity because the models described here have empirical predictions which vary markedly. Perhaps one reason is that most models that fit the current term structure of zero-coupon yields (and, possibly, volatilities or option prices) have so many parameters that testing becomes very difficult. Whatever the reason, it is an important deficiency in this otherwise productive and elegant field. -- Stephen Schaefer - London Business School
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