Valuation of callable range accrual linked to CMS Spread under generalized swap market model

Jie-Cao He, Chang-Chieh Hsieh, Zi-Wei Huang and Shih-Kuei Lin

International Review of Financial Analysis, 2023, vol. 90, issue C

Abstract: In this paper, we price a widely-used financial instrument, the callable range accrual linked to constant maturity swap (CMS) spread, with the least square Monte Carlo method (LSMC) under the generalized swap market model (GSMM). This method, based on the swap rate, does not only provide an intuitive pricing solution, but also captures the characteristics of the swap market, which helps market participants better face the challenge of the London interbank offered rate (LIBOR) phase-out. By choosing the prices valued by the two-factor Hull–White model in Bloomberg as a benchmark, our method provides an accurate result, following the economic intuitions. Last but not least, we examine the impacts from the shifting of the yield curve and volatility term structure by sensitivity analysis. We find that the price positively correlates with the volatility term structure among 1% shifts, while the relationship can be uncertain in larger shifts. The changes in the estimated parameters, such as the yield curve and volatility term structure, might reflect the occurrences of macroeconomic events, such as the COVID-19 pandemic.

Keywords: Interest rate derivatives; Constant maturity swap; Range accrual; Generalized swap market model; Least square Monte Carlo method (search for similar items in EconPapers)
JEL-codes: E43 G13 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521923004726
Full text for ScienceDirect subscribers only

Related works:
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:finana:v:90:y:2023:i:c:s1057521923004726

DOI: 10.1016/j.irfa.2023.102956

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().