A flexible matrix Libor model with smiles

José Da Fonseca, Alessandro Gnoatto and Martino Grasselli

Papers from arXiv.org

Abstract: We present a flexible approach for the valuation of interest rate derivatives based on Affine Processes. We extend the methodology proposed in Keller-Ressel et al. (2009) by changing the choice of the state space. We provide semi-closed-form solutions for the pricing of caps and floors. We then show that it is possible to price swaptions in a multifactor setting with a good degree of analytical tractability. This is done via the Edgeworth expansion approach developed in Collin-Dufresne and Goldstein (2002). A numerical exercise illustrates the flexibility of Wishart Libor model in describing the movements of the implied volatility surface.

Date: 2012-03
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Journal Article: A flexible matrix Libor model with smiles (2013)
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