ORIGINAL ARTICLE
A term structure model for dividends and interest rates
Damir Filipović,
Sander Willems,
Damir Filipović
EPFL and Swiss Finance Institute, Lausanne, Switzerland
Search for more papers by this authorCorresponding Author
Sander Willems
EPFL and Swiss Finance Institute, Lausanne, Switzerland
Correspondence
Sander Willems
Email: willems.sander@gmail.com
Search for more papers by this authorDamir Filipović,
Sander Willems,
Damir Filipović
EPFL and Swiss Finance Institute, Lausanne, Switzerland
Search for more papers by this authorCorresponding Author
Sander Willems
EPFL and Swiss Finance Institute, Lausanne, Switzerland
Correspondence
Sander Willems
Email: willems.sander@gmail.com
Search for more papers by this authorAbstract
Over the last decade, dividends have become a standalone asset class instead of a mere side product of an equity investment. We introduce a framework based on polynomial jump-diffusions to jointly price the term structures of dividends and interest rates. Prices for dividend futures, bonds, and the dividend paying stock are given in closed form. We present an efficient moment based approximation method for option pricing. In a calibration exercise we show that a parsimonious model specification has a good fit with Euribor interest rate swaps and swaptions, Euro Stoxx 50 Index dividend futures and dividend options, and Euro Stoxx 50 Index options.
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