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Uncertain interest rate model for Shanghai interbank offered rate and pricing of American swaption

Author

Listed:
  • Xiangfeng Yang

    (University of International Business and Economics)

  • Hua Ke

    (Tongji University)

Abstract

In the framework of uncertainty theory, this paper investigates the pricing problem of American swaption. By assuming that the floating interest rate obeys an uncertain differential equation, the pricing formula of American swaption is derived. Furthermore, parameter estimation of the uncertain interest rate model is given, and the uncertain hypothesis test shows that the uncertain interest rate model fits the Shanghai interbank offered rate well. Finally, as a byproduct, this paper also indicates that stochastic differential equations cannot model real-world interest rates.

Suggested Citation

  • Xiangfeng Yang & Hua Ke, 2023. "Uncertain interest rate model for Shanghai interbank offered rate and pricing of American swaption," Fuzzy Optimization and Decision Making, Springer, vol. 22(3), pages 447-462, September.
    • Handle: RePEc:spr:fuzodm:v:22:y:2023:i:3:d:10.1007_s10700-022-09399-8
    DOI: 10.1007/s10700-022-09399-8
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    References listed on IDEAS

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    7. Lu, Jing & Yang, Xiangfeng & Tian, Miao, 2022. "Barrier swaption pricing formulae of mean-reverting model in uncertain environment," Chaos, Solitons & Fractals, Elsevier, vol. 160(C).
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