IDEAS home Printed from https://ideas.repec.org/p/chf/rpseri/rp1644.html
   My bibliography  Save this paper

On the American Swaption in the Linear-Rational Framework

Author

Listed:
  • Damir Filipovic

    (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute)

  • Yerkin Kitapbayev

    (Boston University)

Abstract

We study American swaptions in the linear-rational term structure model introduced in Filipovic, Larsson, and Trolle (2016). The American swaption pricing problem boils down to an optimal stopping problem that is analytically tractable. It reduces to a free-boundary problem that we tackle by the local time-space calculus of Peskir (2005). We characterize the optimal stopping boundary as the unique solution to a nonlinear integral equation that can be readily solved numerically. We obtain the arbitrage-free price of the American swaption and the optimal exercise strategies in terms of swap rates for both fixed-rate payer and receiver swaps.

Suggested Citation

  • Damir Filipovic & Yerkin Kitapbayev, 2016. "On the American Swaption in the Linear-Rational Framework," Swiss Finance Institute Research Paper Series 16-44, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1644
    as

    Download full text from publisher

    File URL: http://ssrn.com/abstract=2806119
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    American swaption; swaption; swap; linear-rational term structure model; polynomial diffusion; optimal stopping; free-boundary problem; local time-space calculus; integral equation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp1644. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ridima Mittal (email available below). General contact details of provider: https://edirc.repec.org/data/fameech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.