Variance Optimal Cap Pricing Models
AbstractWe 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.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 1999002.
Date of creation: 01 Dec 1997
Date of revision: 01 Jan 1999
Discount bond option; cap pricing formula; volatility smile; variance optimal measure; implied pricing model;
Other versions of this item:
- 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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- 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.
- Jean-Luc PRIGENT & Olivier RENAULT & Olivier SCAILLET, 2002. "Option Pricing with Discrete Rebalancing," FAME Research Paper Series rp55, International Center for Financial Asset Management and Engineering.
- J.L. Prigent & O. Renault & O. Scaillet., 1999. "Option pricing with discrete rebalancing," THEMA Working Papers 99-41, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- Prigent, J.-L. & Renault, O. & Scaillet, O., 1999. "Option Pricing with Discrete Rebalancing," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1999029, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Oct 1999.
- Jean -Luc Prigent & Olivier Renault & Olivier Scaillet, 1999. "Option Pricing with Discrete Rebalancing," Working Papers 99-61, Centre de Recherche en Economie et Statistique.
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