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A new approximate swaption formula in the LIBOR market model: an asymptotic expansion approach

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  • Atsushi Kawai
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    Abstract

    This paper presents a new approximate pricing formula for European payer swaptions in the LIBOR market model using an asymptotic expansion method. The formula is very flexible, since it can be applied to a wide range of volatility functions. The formula is tested with a log-normal volatility function and a modified CEV volatility function. Numerical results show that the proposed approximate formula is more accurate than other approximate formulae.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/1350486021000029216
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 10 (2003)
    Issue (Month): 1 ()
    Pages: 49-74

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    Handle: RePEc:taf:apmtfi:v:10:y:2003:i:1:p:49-74

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    Web page: http://www.tandfonline.com/RAMF20

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    Related research

    Keywords: Libor Market Model; Swaptions; Asymptotic Expansion; Monte Carlo Simulation; Volatility Skews;

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    Cited by:
    1. Xu, Guoping & Zheng, Harry, 2010. "Basket options valuation for a local volatility jump-diffusion model with the asymptotic expansion method," Insurance: Mathematics and Economics, Elsevier, vol. 47(3), pages 415-422, December.
    2. Akihiko Takahashi & Kohta Takehara, 2007. "An Asymptotic Expansion Approach to Currency Options with a Market Model of Interest Rates under Stochastic Volatility Processes of Spot Exchange Rates," Asia-Pacific Financial Markets, Springer, vol. 14(1), pages 69-121, March.
    3. Akihiko Takahashi & Kohta Takehara & Masashi Toda, 2009. "Computation in an Asymptotic Expansion Method," CIRJE F-Series CIRJE-F-621, CIRJE, Faculty of Economics, University of Tokyo.
    4. Kenichiro Shiraya & Akihiko Takahashi & Akira Yamazaki, 2010. "Pricing Swaptions under the Libor Market Model of Interest Rates with Local-Stochastic Volatility Models," CARF F-Series CARF-F-214, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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