Bonds and the Vasicek Model Flashcards
What is the main prediction of the Pure Expectations Hypothesis
That expected excess returns are zero
How does the Expectations Hypothesis differ from the Pure Expectations Hypothesis?
That there is a premium to holding bonds of different maturities. The premium depends only on maturity
What are the two main testable predictions from the EH?
What do we assume to get a tractable pricing formula in the Vasicek model?
That prices and the SDF are jointly lognormal?
What does affine refer to?
That log bond prices and yields are linear in the state variables
What is the general pricing equation in the Vasicek model?
How does the shape of the yield curve depend on lambda?
If lambda is zero, the yield curve is flat. If it is negative, it slopes upwards (as in reality), if it is positive, it slopes downwards
What are some problems with the Vacicek mode?
Insufficient curvature in the mean spot rates
Volatility is constant
Allows for negative rates
Cannoy produce inverted humb-shapes (the Cox-Ingersoll-Ross can do that)
No modelling of current spot rate (it is an input)
What is the definition of Holding Period Return?
State log HPR
What are the two main testable predictions of the model?
