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Pricing Convexity Adjustment with Wiener Chaos

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Author Info
Eric Benhamou
Abstract

This paper presents an approximated formula of the convexity adjustment of Constant Maturity Swap rates, using Wiener Chaos expansion, for multi-factor lognormal zero coupon models. We derive closed formulae for CMS bond and swap and apply results to various well-known one-factor models (Ho and Lee (1986), Amin and Jarrow (1992), Hull and White (1990), Mercurio and Moraleda (1996)). Quasi Monte Carlo simulations confirm the efficiency of the approximation.

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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp351.

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Date of creation: Apr 2000
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Handle: RePEc:fmg:fmgdps:dp351

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  1. Eric Benhamou, 2002. "A Martingale Result for Convexity Adjustment in the Black Pricing Model," Finance 0212005, EconWPA. [Downloadable!]
  2. Nabyl Belgrade & Eric Benhamou & Etienne Koehler, 2004. "A market model for inflation," Cahiers de la Maison des Sciences Economiques b04050, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
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This page was last updated on 2009-12-13.

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