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Pricing caps with HJM models: the benefits of humped volatility

  • Jury Falini

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    In this paper we compare different multifactor HJM models with humped volatility structures, to each other and to models with strictly decreasing volatility. All the models are estimated on Euribor and swap rates panel data. We develop the analysis in two steps: first we study the in-sample properties of the estimated models, then we study the pricing performance on caps. We find the humped volatility specification to greatly improve the model estimation and to provide sufficiently accurate cap prices, although the models has been calibrated on interest rates data and not on cap prices. Moreover we find the two factor humped volatility model to outperform the three factor models in pricing caps

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    File URL: http://www.econ-pol.unisi.it/quaderni/563.pdf
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    Paper provided by Department of Economics, University of Siena in its series Department of Economics University of Siena with number 563.

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    Date of creation: Aug 2009
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    Handle: RePEc:usi:wpaper:563
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