WHICH PROCESS GIVES RISE TO THE OBSERVED DEPENDENCE OF SWAPTION IMPLIED VOLATILITY ON THE UNDERLYING?

Riccardo Rebonato ()
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Riccardo Rebonato: Quantitative Research Centre, Group Risk, Royal Bank of Scotland, 2nd Floor, Waterhouse Square, 138-142, Holborn, London, EC1N 2TH, UK;

International Journal of Theoretical and Applied Finance (IJTAF), 2003, vol. 06, issue 04, 419-442

Abstract: In this paper we investigate whether a CEV model can account for the observed variation in the at-the-money implied volatility as a function of the level of the at-the-money forward rate. We also determine which exponent β in the CEV process for the swap rate best accounts for the observed behaviour of the implied volatilities.

Keywords: CEV; swaption implied volatilities; LIBOR market model (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:06:y:2003:i:04:n:s0219024903002079

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DOI: 10.1142/S0219024903002079

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