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Explicit local volatility formula for Cheyette-type interest rate models

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  • Alexander Gairat
  • Vyacheslav Gorovoy
  • Vadim Shcherbakov

Abstract

We derive an explicit analytical approximation for the local volatility function in the Cheyette interest rate model, extending the classical Dupire framework to fixed-income markets. The result expresses local volatility in terms of time and strike derivatives of the Bachelier implied variance, naturally generalizes to multi-factor Cheyette models, and provides a practical tool for model calibration.

Suggested Citation

  • Alexander Gairat & Vyacheslav Gorovoy & Vadim Shcherbakov, 2025. "Explicit local volatility formula for Cheyette-type interest rate models," Papers 2506.23876, arXiv.org.
    • Handle: RePEc:arx:papers:2506.23876
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    File URL: http://arxiv.org/pdf/2506.23876
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