Method | Target function value |
Gram-Charlier (pricing) | 3.59E-05 |
Edgeworth (pricing) | 3.02E-05 |
Edgeworth (smile) | 3.00E-05 |
Heston | 2.03E-05 |
This paper demonstrates the efficiency of using Edgeworth and Gram-Charlier expansions in the calibration of the Libor Market Model with Stochastic Volatility and Displaced Diffusion (DD-SV-LMM). Our approach brings together two research areas; first, the results regarding the SV-LMM since the work of [
Citation: |
Table 1. Sum of squared differences between market volatilities and those calculated with each method after calibration
Method | Target function value |
Gram-Charlier (pricing) | 3.59E-05 |
Edgeworth (pricing) | 3.02E-05 |
Edgeworth (smile) | 3.00E-05 |
Heston | 2.03E-05 |
Table 2. CPU time required for calibration using a 2500 optimization iterations budget
Method | CPU Time |
Heston | 425.1 |
Edgeworth | 8.2 |
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ATM Monte Carlo swaption volatilities for 5-years maturity
Monte Carlo swaption volatility skews for 5-years maturity
ATM swaption volatilities with given parameters for 5-years maturity
Swaption volatility skew with given parameters for 5-years maturity
ATM Monte Carlo swaption volatilities for 10-years maturity
Monte Carlo swaption volatility skews for 10-years maturity
ATM swaption volatilities with given parameters for 10-years maturity
Swaption volatility skews with given parameters for 10-years maturity
ATM Monte Carlo swaption volatilities for 20-years maturity
Monte Carlo swaption volatility skews for 20-years maturity
ATM swaption volatilities with given parameters for 20-years maturity
Swaption volatility skews with given parameters for 20-years maturity