Mizuho-DL Financial Technology Co.,Ltd.
Graduate School of Economics, the University of Tokyo
抄録
This paper presents a new approximation formula for pricing swaptions and caps/floors under the Libor market model of interest rates (LMM) with the local and affine-type stochastic volatility. In particular, two approximation methods are applied in pricing, one of which is so called “drift-freezing” that fixes parts of the underlying stochastic processes at their initial values. Another approximation is based on an asymptotic expansion approach. An advantage of our method is that those approximations can be applied in a unified manner to a general class of local-stochastic volatility models of interest rates. // To demonstrate effectiveness of our method, the paper takes CEVHeston LMM and Quadratic-Heston LMM as examples; it confirms sufficient flexibility of the models for calibration in a caplet market and enough accuracies of the approximation method for numerical evaluation of swaption values under the models.
内容記述
Revised in October 2011 and February 2012; forthcoming in Wilmott Journal.
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雑誌名
Discussion paper series. CIRJE-F
巻
CIRJE-F-737
発行年
2010-04
書誌レコードID
AA11450569
フォーマット
application/pdf
日本十進分類法
335
出版者
日本経済国際共同センター
出版者別名
Center for International Research on the Japanese Economy
Pricing Swaptions under the Libor Market Model of Interest Rates with Local-Stochastic Volatility Models
