Asset-backed stable numeraire approach for sustainable valuation

Date

2020-05-01

Author

Aydin, Nadi Serhan
Rainer, Martin

Metadata

Show full item record

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Item Usage Stats

139
views

0
downloads

Interest rates underpin almost every instrument/transaction in conventional financial markets. Valuation of the instruments in relation to interest rates remains meaningful only ifcashcan be attributed a worth of its own (which is generally assumed to accumulate over time). The relevant concepts such as the stochastic short rate and the conventional numeraire (i.e. the money market account) not only become restrictive when one attempts to build more realistic models in quantitative finance, but also - as we demonstrate in this work - their application has de-stabilizing effects on asset valuations. This paper presents a detailed critique of the conventional numeraire and proposes an asset-backed stable numeraire for sustainable valuation of assets and/or transactions. In particular, we demonstrate how some of the key benchmarks of a sustainable footprint may be used as a numeraire currency. We also unveil the implicit assumption underlying the common practice of straightforward factorization in conventional relative pricing to be false.

Subject Keywords

Asset-backed numeraire, Interest-rate benchmarks, Fair valuation, Conventional pricing, Risk-neutral valuation

URI

https://hdl.handle.net/11511/65944

Journal

JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT

DOI

https://doi.org/10.1080/20430795.2020.1769983

Collections

Graduate School of Applied Mathematics, Article

Suggestions

OpenMETU
Core

Term structure of government bond yields : a macro-finance approach Artam, Halil; Yıldırak, Şahap Kasırga; Department of Financial Mathematics (2006) Interactions between macroeconomic fundamentals and term structure of interest rates be stronger according to the way of changes in structure of worldwide economy. Combined macro-finance analysis determines the joint dynamics of term structure of interest rates and macroeconomic fundamentals. This thesis provides analysis of two existing macro-finance models and an original one. Parameter estimations for these three macro-finance term structure models are done for monthly Turkish data by use of an efficient...
Monetary Policy in The General Theory Ekinci, Nazım Kadri (Orta Doğu Teknik Üniversitesi (Ankara, Turkey), 2008-6) The theory of interest rate is central to Keynesian macroeconomics. This paper provides an interpretation of Keynes’ conventional theory of the interest rate. Accordingly, the interest rate can only be determined in the market, if expectations converge. The central bank is a market-maker, because of its capacity to manage expectations and to affect market outcomes. On the other hand, interest rate and asset prices determine the rate at which wealth is converted into income. This may be a crucial considerati...
EXAMINATION OF BOND RISK PREMIA FROM THE BANKING PERSPECTIVE Orhan, Selim; Danışoğlu, Seza; Department of Financial Mathematics (2022-5-10) Banks are considered as the marginal and sophisticated investors of financial markets. This is evident in the Haddad and Sraer (2020) study that examines the US government bond excess returns. This study extends the Haddad/Sraer analysis to the Turkish government bond market. According to the forecasting results, exposure ratio provides explanatory power over bond excess returns, especially for longer maturities. On the other hand, output gap and industrial growth present strong in-sample forecasting power ...
Optimal monetary policy and the timing of asset trade in open economies Senay, Ozge; Sutherland, Alan (2007-05-01) This paper analyses the timing of asset trade and its implications for monetary policy and welfare in open economies. Optimal policy is shown to differ significantly depending on whether asset trade takes place before or after policy decisions are made.
Option pricing in interest rate derivatives Küçüksaraç, Doruk; Danışoğlu, Seza; Department of Financial Mathematics (2020) The valuation of interest rate derivatives and embedded options in fixed-income securities is crucial for market practitioners. Although there have been many models to price interest rate derivatives, the inconsistency across the assumptions of the models creates difficulty in aggregating interest rate exposures. Besides, the models tend to be applicable to specific cases. In this regard, adaptation of a general methodology to price all interest rate derivatives without making additional assumptions has cri...

Citation Formats

N. S. Aydin and M. Rainer, “Asset-backed stable numeraire approach for sustainable valuation,” JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT, pp. 0–0, 2020, Accessed: 00, 2020. [Online]. Available: https://hdl.handle.net/11511/65944.