Uncertain interest rate model for Shanghai interbank offered rate and pricing of American swaption

Xiangfeng Yang () and Hua Ke ()
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Xiangfeng Yang: University of International Business and Economics
Hua Ke: Tongji University

Fuzzy Optimization and Decision Making, 2023, vol. 22, issue 3, No 5, 447-462

Abstract: Abstract In the framework of uncertainty theory, this paper investigates the pricing problem of American swaption. By assuming that the floating interest rate obeys an uncertain differential equation, the pricing formula of American swaption is derived. Furthermore, parameter estimation of the uncertain interest rate model is given, and the uncertain hypothesis test shows that the uncertain interest rate model fits the Shanghai interbank offered rate well. Finally, as a byproduct, this paper also indicates that stochastic differential equations cannot model real-world interest rates.

Keywords: Uncertainty theory; Uncertain differential equation; Uncertain interest rate model; American swaption (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (10)

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DOI: 10.1007/s10700-022-09399-8

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