Fast swaption pricing under the market model with a square-root volatility process. (English) Zbl 1134.91380
Summary: We study a correlation-based LIBOR market model with a square-root volatility process. This model captures downward volatility skews through taking negative correlations between forward rates and the multiplier. An approximate pricing formula is developed for swaptions, and the formula is implemented via fast Fourier transform. Numerical results on pricing accuracy are presented, which strongly support the approximations made in deriving the formula.
MSC:
| 91B24 | Microeconomic theory (price theory and economic markets) |
| 91B26 | Auctions, bargaining, bidding and selling, and other market models |
| 65-06 | Proceedings, conferences, collections, etc. pertaining to numerical analysis |
Keywords:
LIBOR model; stochastic volatility; square-root process; swaptions; fast Fourier transform (FFT)References:
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