EFFICIENT LONG-DATED SWAPTION VOLATILITY APPROXIMATION IN THE FORWARD-LIBOR MODEL
Jacques van Appel () and
Thomas A. McWalter
Additional contact information
Jacques van Appel: Faculty of Science, Department of Statistics, University of Johannesburg, P.O. Box 524, Auckland Park, 2006, South Africa
Thomas A. McWalter: The African Institute of Financial Markets and Risk Management, University of Cape Town, Private Bag X3, Rondebosch, 7701, South Africa3Faculty of Economic and Financial Sciences, Department of Finance & Investment Management, University of Johannesburg, P.O. Box 524, Auckland Park, 2006, South Africa
International Journal of Theoretical and Applied Finance (IJTAF), 2018, vol. 21, issue 04, 1-26
We provide efficient swaption volatility approximations for longer maturities and tenors under the lognormal forward-LIBOR model (LFM). In particular, we approximate the swaption volatility with a mean update of the spanning forward rates. Since the joint distribution of the forward rates is not known under a typical pricing measure, we resort to numerical discretization techniques. More specifically, we approximate the mean forward rates with a multi-dimensional weak order 2.0 Itō–Taylor scheme. The higher-order terms allow us to more accurately capture the state dependence in the drift terms and compute conditional expectations with second-order accuracy. We test our approximations for longer maturities and tenors using a quasi-Monte Carlo (QMC) study and find them to be substantially more effective when compared to the existing approximations, particularly for calibration purposes.
Keywords: LIBOR model; swaption; volatility approximation; efficient calibration (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Access to full text is restricted to subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:21:y:2018:i:04:n:s0219024918500206
Ordering information: This journal article can be ordered from
Access Statistics for this article
International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston
More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().