A new approximate swaption formula in the LIBOR market model: an asymptotic expansion approach

Atsushi Kawai

Applied Mathematical Finance, 2003, vol. 10, issue 1, 49-74

Abstract: This paper presents a new approximate pricing formula for European payer swaptions in the LIBOR market model using an asymptotic expansion method. The formula is very flexible, since it can be applied to a wide range of volatility functions. The formula is tested with a log-normal volatility function and a modified CEV volatility function. Numerical results show that the proposed approximate formula is more accurate than other approximate formulae.

Keywords: Libor Market Model; Swaptions; Asymptotic Expansion; Monte Carlo Simulation; Volatility Skews (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (16)

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DOI: 10.1080/1350486021000029216

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