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Variance Optimal Cap Pricing Models

Author

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  • Jean-Paul Laurent

    (Crest)

  • Olivier Scaillet

    (Crest)

Abstract

We propose new closed-form pricing formulas for interest rate options which guarantee perfect compatibility with volatility smiles. These cap pricing formulas are computed under variance optimal measures in the framework of the market model or the Gaussian model and achieve an exact calibration of observed market prices. They are presented in a general setting allowing to study model and numéraire choice effects on the computed prices. Numéraire dependence is particularly emphasized. A numerical example and an empirical application on market data are given to illustrate the practical use of the calibration procedure.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Jean-Paul Laurent & Olivier Scaillet, 1999. "Variance Optimal Cap Pricing Models," Working Papers 99-07, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:99-07
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    Cited by:

    1. Jean -Luc Prigent & Olivier Renault & Olivier Scaillet, 1999. "An Autoregressive Conditional Binomial Option Pricing Model," Working Papers 99-65, Center for Research in Economics and Statistics.
    2. Prigent, Jean-Luc & Renault, Olivier & Scaillet, Olivier, 2004. "Option pricing with discrete rebalancing," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 133-161, January.

    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics

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