Stochastic Volatility Model with Time-dependent Skew
AbstractA formula is derived for the 'effective' skew in a stochastic volatility model with a time-dependent local volatility function. The formula relates the total amount of skew generated by the model over a given time period to the time-dependent slope of the instantaneous local volatility function. A new 'effective' volatility approximation is also derived. The utility of the formulas is demonstrated by building a forward Libor model that can be calibrated to swaption smiles that vary across the swaption grid.
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Bibliographic InfoArticle provided by Taylor and Francis Journals in its journal Applied Mathematical Finance.
Volume (Year): 12 (2005)
Issue (Month): 2 ()
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Web page: http://taylorandfrancis.metapress.com/link.asp?target=journal&id=100141
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