\`x^2+y_1+z_12^34\`
Advanced Search
Article Contents
Article Contents

LIBOR market model with stochastic volatility

Abstract Related Papers Cited by
  • In this paper we extend the standard LIBOR market model to accommodate the pronounced phenomenon of implied volatility smiles/skews. We adopt a multiplicative stochastic factor to the volatility functions of all relevant forward rates. The stochastic factor follows a square-root diffusion process, and it can be correlated to the forward rates. For any swap rate, we derive an approximate process under its corresponding forward swap measure. By utilizing the analytical tractability of the approximate process, we develop a closed-form formula for swaptions in term of Fourier transforms. Extensive numerical tests are carried out to support the swaptions formula. The extended model captures the downward volatility skews by taking negative correlations between forward rates and their volatilities, which is consistent with empirical findings.
    Mathematics Subject Classification: 60J60, 90C47.

    Citation:

    \begin{equation} \\ \end{equation}
  • 加载中
SHARE

Article Metrics

HTML views() PDF downloads(287) Cited by(0)

Access History

Other Articles By Authors

Catalog

    /

    DownLoad:  Full-Size Img  PowerPoint
    Return
    Return