A flexible matrix Libor model with smiles

José Da Fonseca, Alessandro Gnoatto and Martino Grasselli

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 4, 774-793

Abstract: We present a flexible approach for the valuation of interest rate derivatives based on affine processes. We extend the methodology proposed in Keller-Ressel et al. (in press) by changing the choice of the state space. We provide semi-closed-form solutions for the pricing of caps and floors. We then show that it is possible to price swaptions in this multifactor setting with a good degree of analytical tractability. This is done via the Edgeworth expansion approach developed in Collin-Dufresne and Goldstein (2002). A numerical exercise illustrates the flexibility of Wishart Libor model in describing the movements of the implied volatility surface.

Keywords: Affine processes; Wishart process; Libor market model; Fast Fourier transform; Caps; Floors; Swaptions (search for similar items in EconPapers)
JEL-codes: C51 G13 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188912002291
Full text for ScienceDirect subscribers only

Related works:
Working Paper: A flexible matrix Libor model with smiles (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:4:p:774-793

DOI: 10.1016/j.jedc.2012.11.006

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().