Lecture 9 - Yield Curve Arbitrage

author: John Geanakoplos, Yale University
recorded by: Yale University
published: March 17, 2012,   recorded: October 2009,   views: 4529
released under terms of: Creative Commons Attribution No Derivatives (CC-BY-ND)
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Where can you find the market rates of interest (or equivalently the zero coupon bond prices) for every maturity? This lecture shows how to infer them from the prices of Treasury bonds of every maturity, first using the method of replication, and again using the principle of duality. Treasury bond prices, or at least Treasury bond yields, are published every day in major newspapers. From the zero coupon bond prices one can immediately infer the forward interest rates. Under certain conditions these forward rates can tell us a lot about how traders think the prices of Treasury bonds will evolve in the future.

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