The implied views of bond traders on the spot equity market
This study delves into the temporal dynamics within the equity market through the lens of bond traders. Recognizing that the riskless interest rate fluctuates over time, we leverage the Black-Derman-Toy model to trace its temporal evolution. To gain insights from a bond trader's perspective, we...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
| Published: |
Frontiers Media S.A.
2023-12-01
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| Series: | Frontiers in Applied Mathematics and Statistics |
| Subjects: | |
| Online Access: | https://www.frontiersin.org/articles/10.3389/fams.2023.1324079/full |
| _version_ | 1797427159404380160 |
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| author | Yifan He Yuan Hu Svetlozar Rachev |
| author_facet | Yifan He Yuan Hu Svetlozar Rachev |
| author_sort | Yifan He |
| collection | DOAJ |
| description | This study delves into the temporal dynamics within the equity market through the lens of bond traders. Recognizing that the riskless interest rate fluctuates over time, we leverage the Black-Derman-Toy model to trace its temporal evolution. To gain insights from a bond trader's perspective, we focus on a specific type of bond: the zero-coupon bond. This paper introduces a pricing algorithm for this bond and presents a formula that can be used to ascertain its real value. By constructing an equation that juxtaposes the theoretical value of a zero-coupon bond with its actual value, we can deduce the risk-neutral probability. It is noteworthy that the risk-neutral probability correlates with variables like the instantaneous mean return, instantaneous volatility, and inherent upturn probability in the equity market. Examining these relationships enables us to discern the temporal shifts in these parameters. Our findings suggest that the mean starts at a negative value, eventually plateauing at a consistent level. The volatility, on the other hand, initially has a minimal positive value, peaks swiftly, and then stabilizes. Lastly, the upturn probability is initially significantly high, plunges rapidly, and ultimately reaches equilibrium. |
| first_indexed | 2024-03-09T08:40:04Z |
| format | Article |
| id | doaj.art-9136cee8f6114d8489c232917b147ba7 |
| institution | Directory Open Access Journal |
| issn | 2297-4687 |
| language | English |
| last_indexed | 2024-03-09T08:40:04Z |
| publishDate | 2023-12-01 |
| publisher | Frontiers Media S.A. |
| record_format | Article |
| series | Frontiers in Applied Mathematics and Statistics |
| spelling | doaj.art-9136cee8f6114d8489c232917b147ba72023-12-02T17:04:21ZengFrontiers Media S.A.Frontiers in Applied Mathematics and Statistics2297-46872023-12-01910.3389/fams.2023.13240791324079The implied views of bond traders on the spot equity marketYifan He0Yuan Hu1Svetlozar Rachev2Department of Mathematics and Statistics, Texas Tech University, Lubbock, TX, United StatesDepartment of Mathematics, University of California San Diego, La Jolla, CA, United StatesDepartment of Mathematics and Statistics, Texas Tech University, Lubbock, TX, United StatesThis study delves into the temporal dynamics within the equity market through the lens of bond traders. Recognizing that the riskless interest rate fluctuates over time, we leverage the Black-Derman-Toy model to trace its temporal evolution. To gain insights from a bond trader's perspective, we focus on a specific type of bond: the zero-coupon bond. This paper introduces a pricing algorithm for this bond and presents a formula that can be used to ascertain its real value. By constructing an equation that juxtaposes the theoretical value of a zero-coupon bond with its actual value, we can deduce the risk-neutral probability. It is noteworthy that the risk-neutral probability correlates with variables like the instantaneous mean return, instantaneous volatility, and inherent upturn probability in the equity market. Examining these relationships enables us to discern the temporal shifts in these parameters. Our findings suggest that the mean starts at a negative value, eventually plateauing at a consistent level. The volatility, on the other hand, initially has a minimal positive value, peaks swiftly, and then stabilizes. Lastly, the upturn probability is initially significantly high, plunges rapidly, and ultimately reaches equilibrium.https://www.frontiersin.org/articles/10.3389/fams.2023.1324079/fullBlack-Derman-Toy modelzero-coupon bondinstantaneous mean returninstantaneous volatilityinherent upturn probabilityempirical research |
| spellingShingle | Yifan He Yuan Hu Svetlozar Rachev The implied views of bond traders on the spot equity market Frontiers in Applied Mathematics and Statistics Black-Derman-Toy model zero-coupon bond instantaneous mean return instantaneous volatility inherent upturn probability empirical research |
| title | The implied views of bond traders on the spot equity market |
| title_full | The implied views of bond traders on the spot equity market |
| title_fullStr | The implied views of bond traders on the spot equity market |
| title_full_unstemmed | The implied views of bond traders on the spot equity market |
| title_short | The implied views of bond traders on the spot equity market |
| title_sort | implied views of bond traders on the spot equity market |
| topic | Black-Derman-Toy model zero-coupon bond instantaneous mean return instantaneous volatility inherent upturn probability empirical research |
| url | https://www.frontiersin.org/articles/10.3389/fams.2023.1324079/full |
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