Fast swaption pricing under the market model with a square-root volatility process

Lixin Wu and Fan Zhang

Quantitative Finance, 2008, vol. 8, issue 2, 163-180

Abstract: In this paper we study a correlation-based LIBOR market model with a square-root volatility process. This model captures downward volatility skews through taking negative correlations between forward rates and the multiplier. An approximate pricing formula is developed for swaptions, and the formula is implemented via fast Fourier transform. Numerical results on pricing accuracy are presented, which strongly support the approximations made in deriving the formula.

Keywords: LIBOR model; Stochastic volatility; Square-root process; Swaptions; Fast Fourier transform (FFT) (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (2)

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DOI: 10.1080/14697680701310961

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