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Fast swaption pricing under the market model with a square-root volatility process

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  • Lixin Wu
  • Fan Zhang
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    Abstract

    In this paper we study a correlation-based LIBOR market model with a square-root volatility process. This model captures downward volatility skews through taking negative correlations between forward rates and the multiplier. An approximate pricing formula is developed for swaptions, and the formula is implemented via fast Fourier transform. Numerical results on pricing accuracy are presented, which strongly support the approximations made in deriving the formula.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/14697680701310961
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    Bibliographic Info

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

    Volume (Year): 8 (2008)
    Issue (Month): 2 ()
    Pages: 163-180

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    Handle: RePEc:taf:quantf:v:8:y:2008:i:2:p:163-180

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    Related research

    Keywords: LIBOR model; Stochastic volatility; Square-root process; Swaptions; Fast Fourier transform (FFT);

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    Cited by:
    1. Marcel Ladkau & John G. M. Schoenmakers & Jianing Zhang, 2012. "Libor model with expiry-wise stochastic volatility and displacement," Papers 1204.5698, arXiv.org.
    2. Grzelak, Lech & Oosterlee, Kees, 2010. "An Equity-Interest Rate Hybrid Model With Stochastic Volatility and the Interest Rate Smile," MPRA Paper 20574, University Library of Munich, Germany.

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