APPROXIMATIONS OF BOND AND SWAPTION PRICES IN A BLACK–KARASIŃSKI MODEL

Andrzej Daniluk () and Rafał Muchorski ()
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Andrzej Daniluk: Institute of Mathematics, Jagiellonian University, ul. Łojasiewicza 6, 30-348 Krakow, Poland
Rafał Muchorski: Risk Management Department, TUiR Allianz Polska SA, ul. Rodziny Hiszpańskich 1, 02-685 Warsaw, Poland

International Journal of Theoretical and Applied Finance (IJTAF), 2016, vol. 19, issue 03, 1-32

Abstract: We derive semi-analytic approximation formulae for bond and swaption prices in a Black–Karasiński (BK) interest rate model. Approximations are obtained using a novel technique based on the Karhunen–Loève expansion. Formulas are easily computable and prove to be very accurate in numerical tests. This makes them useful for numerically efficient calibration of the model.

Keywords: Stochastic processes; derivative pricing; Black–Karasiński model; Karhunen–Loève expansion (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219024916500175

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