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Which Process Gives Rise To The Observed Dependence Of Swaption Implied Volatility On The Underlying?

Author

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  • RICCARDO REBONATO

    (Quantitative Research Centre, Group Risk, Royal Bank of Scotland, 2nd Floor, Waterhouse Square, 138-142, Holborn, London, EC1N 2TH, UK;
    Oxford Financial Research Centre, Oxford University, Oxford, OX1 2JD, UK)

Abstract

In this paper we investigate whether a CEV model can account for the observed variation in the at-the-money implied volatility as a function of the level of the at-the-money forward rate. We also determine which exponent β in the CEV process for the swap rate best accounts for the observed behaviour of the implied volatilities.

Suggested Citation

  • Riccardo Rebonato, 2003. "Which Process Gives Rise To The Observed Dependence Of Swaption Implied Volatility On The Underlying?," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 419-442.
    • Handle: RePEc:wsi:ijtafx:v:06:y:2003:i:04:n:s0219024903002079
    DOI: 10.1142/S0219024903002079
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    Cited by:

    1. L. Steinruecke & R. Zagst & A. Swishchuk, 2015. "The Markov-switching jump diffusion LIBOR market model," Quantitative Finance, Taylor & Francis Journals, vol. 15(3), pages 455-476, March.
    2. Mark Joshi & Riccardo Rebonato, 2003. "A displaced-diffusion stochastic volatility LIBOR market model: motivation, definition and implementation," Quantitative Finance, Taylor & Francis Journals, vol. 3(6), pages 458-469.
    3. Riccardo Rebonato, 2006. "Forward-Rate Volatilities And The Swaption Matrix: Why Neither Time-Homogeneity Nor Time-Dependence Are Enough," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(05), pages 705-746.

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