A market model for pricing inflation indexed bonds with jumps incorporation

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2008

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Güney, İbrahim Ethem

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Protection against inflation is an essential part of the today's financial markets, particularly in high-inflation economies. Hence, nowadays inflation indexed instruments are being increasingly popular in the world financial markets. In this thesis, we focus on pricing of the inflation-indexed bonds which are the unique inflation-indexed instruments traded in the Turkish bond market. Firstly, we review the Jarrow-Yildirim model which deals with pricing of the inflation-indexed instruments within the HJM framework. Then, we propose a pricing model that is an extension of the Jarrow-Yildirim model. The model allows instantaneous forward rates, inflation index and bond prices to be driven by both a standard Brownian motion and a finite number of Poisson processes. A closed-form pricing formula for an European call option on the inflation index is also derived.

Subject Keywords

Finance.

URI

http://etd.lib.metu.edu.tr/upload/3/12609792/index.pdf
https://hdl.handle.net/11511/17775

Collections

Graduate School of Applied Mathematics, Thesis

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Citation Formats

İ. E. Güney, “A market model for pricing inflation indexed bonds with jumps incorporation,” M.S. - Master of Science, Middle East Technical University, 2008.