Bermudan swaptions in Hull-White one-factor model: analytical and numerical approaches
AbstractA popular way to value (Bermudan) swaption in a Hull-White or extended Vasicek model is to use a tree approach. In this note we show that a more direct approach through iterated numerical integration is also possible. A brute force numerical integration would lead to a complexity exponential in the number of exercise dates in the base of the number of points ($p^N$). By carefully choosing the integration points and their order we can reduce it to a complexity $pN^2$ versus a quadratic $(pN)^2$ in the tree. We also provide a semi-explicit formula that leads to a faster converging implementation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0505023.
Length: 9 pages
Date of creation: 30 May 2005
Date of revision:
Note: Type of Document - pdf; pages: 9. Draft version, comments welcome. Math Subject Classification MSC2000: 91B28, 91B24, 91B70
Contact details of provider:
Web page: http://22.214.171.124
Bermudan option; swaption; Hull-White model; one-factor model; numerical integration.;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-06-05 (All new papers)
- NEP-CMP-2005-06-05 (Computational Economics)
- NEP-FIN-2005-06-05 (Finance)
- NEP-MAC-2005-06-05 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
- Marc Henrard, 2003. "Explicit bond option and swaption formula in Heath-Jarrow-Morton one factor model," Finance 0310009, EconWPA.
- Marc Henrard, 2006. "A Semi-Explicit Approach to Canary Swaptions in HJM One-Factor Model," Applied Mathematical Finance, Taylor and Francis Journals, vol. 13(1), pages 1-18.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.