By a News Reporter-Staff News Editor at Business & Finance Week -- Current study results on Economics - Economic Dynamics have been published. According to news reporting originating in Palermo, Italy, by VerticalNews journalists, research stated, “We model the super-replication of payoffs linked to a country’s GDP as a stochastic linear program on a discrete time and state-space scenario tree to price GDP-linked bonds. As a byproduct of the model we obtain a hedging portfolio.”
Financial support for this research came from European Union Horizon 2020 research.
The news reporters obtained a quote from the research from the University of Palermo, “Using linear programming duality we compute also the risk premium. The model applies to coupon-indexed and principal indexed bonds, and allows the analysis of bonds with different design parameters (coupon, target GDP growth rate, and maturity). We calibrate for UK and US instruments, and carry out sensitivity analysis of prices and risk premia to the risk factors and bond design parameters. We also compare coupon-indexed and principal-indexed bonds. Further results with calibrated instruments for Germany, Italy and South Africa shed light on a policy question, whether the risk premia of these bonds make them beneficial for sovereigns. Our findings affirm that designs are possible for both coupon-indexed and principal-indexed bonds that can benefit a sovereign, with an advantage for coupon indexed bonds.”
According to the news reporters, the research concluded: “This finding is robust, but a nuanced reading is needed due to the many inter-related risk factors and design parameters that affect prices and premia.”
For more information on this research see: Pricing and hedging GDP-linked bonds in incomplete markets. Journal of Economic Dynamics & Control , 2018;88():137-155. Journal of Economic Dynamics & Control can be contacted at: Elsevier Science Bv, PO Box 211, 1000 Ae Amsterdam, Netherlands. (Elsevier - www.elsevier.com; Journal of Economic Dynamics & Control - http://www.journals.elsevier.com/journal-of-economic-dynamics-and-control/)
Our news correspondents report that additional information may be obtained by contacting A. Consiglio, University of Palermo, Palermo, Italy.
The direct object identifier (DOI) for that additional information is: https://doi.org/10.1016/j.jedc.2018.01.001. This DOI is a link to an online electronic document that is either free or for purchase, and can be your direct source for a journal article and its citation.
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CITATION: (2018-04-21), New Economic Dynamics Study Findings Have Been Reported by Researchers at University of Palermo (Pricing and hedging GDP-linked bonds in incomplete markets), Business & Finance Week, 78, ISSN: 1945-6441, BUTTER® ID: 015501487
From the newsletter Business & Finance Week.
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