Explicit caplet implied volatilities for quadratic term-structure models

Matthew Lorig and Natchanon Suaysom ()
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Matthew Lorig: Department of Applied Mathematics, University of Washington, Seattle, WA, USA
Natchanon Suaysom: Department of Applied Mathematics, University of Washington, Seattle, WA, USA

International Journal of Financial Engineering (IJFE), 2024, vol. 11, issue 01, 1-28

Abstract: We derive an explicit asymptotic approximation for implied volatilities of caplets under the assumption that the short-rate is described by a generic quadratic term-structure model. In addition to providing an asymptotic accuracy result, we perform numerical experiments in order to gauge the accuracy of our approximation.

Keywords: Quadratic term-structure; simple forward rate; implied volatility; caplet (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1142/S242478632350041X

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