Frank de Jong

Measures of Contributions to Price Discovery: A Comparison

This note clarifies the relation between two competing definitions of the contribution to pricediscovery in market microstructure models: (i) the information share and (ii) the common factorcomponent weight. It is demonstrated that the two measures are closely related, but that only theinformation share takes into account the variability of the innovations in each markets price.

The dynamics of the forward interest rate curve: A formulation with state variables

An endless track is provided and has a main body made primarily of an elastomeric material and is adapted to be moved in an endless path having a longitudinal axis; and, the main body comprises an inside surface and a ground engaging surface with the ground engaging surface including a main surface and a plurality of ribs arranged in a cellular pattern defined by a plurality of cells with each of the cells having at least one rib thereof arranged at an acute angle with the axis. The ribs are adapted to provide continuous support for the track, resist sliding movement of the track transverse the axis, and confine flowable material, such as snow and mud, on which the track may be supported to minimize sinking thereof during operation of the track.

On the Information in the Interest Rate Term Structure and Option Prices

Cap and swaption prices contain information on interest rate volatilities and correlations. In this paper, we examine whether this information in cap and swaption prices is consistent with realized movements of the interest rate term structure. To extract an option-implied interest rate covariance matrix from cap and swaption prices, we use Libor market models and discrete-tenor string models as a modelling framework. We propose a flexible parameterization of the interest rate covariance matrix, which cannot be generated by standard low-factor term structure models. The empirical analysis is based on weekly US data from 1995 to 1999. Our empirical results show that the option prices imply a covariance matrix of interest rates that is significantly different from the covariance matrix implied by realized interest rate changes. In particular, if one uses the latter covariance matrix to price caps and swaptions, one significantly underprices these options. We discuss and analyze several explanations for our findings. JEL Codes: G12, G13, E43.