A Term Structure Model for Dividends and Interest Rates

Over the last decade, dividends have increasingly become a standalone asset class instead of a mere side product of an equity investment. In this paper we present a framework based on polynomial processes to jointly price the... [ view full abstract ]

Over the last decade, dividends have increasingly become a standalone asset class instead of a mere side product of an equity investment. In this paper we present a framework based on polynomial processes to jointly price the term structures of dividends and interest rates. The framework has desirable features such as: i) seasonal behavior in the dividend dynamics, ii) closed-form prices for the term structures of dividend futures and interest rate swaps, iii) efficient moment-based approximations for dividend futures options, stock options, and interest rate swaptions, and iv) a flexible correlation structure between the two term structures.