Watanabe's expansion: A Solution for the convexity conundrum

David Garc\'ia-Lorite and Raul Merino

Papers from arXiv.org

Abstract: In this paper, we present a new method for pricing CMS derivatives. We use Mallaivin's calculus to establish a model-free connection between the price of a CMS derivative and a quadratic payoff. Then, we apply Watanabe's expansions to quadratic payoffs case under local and stochastic local volatility. Our approximations are generic. To evaluate their accuracy, we will compare the approximations numerically under the normal SABR model against the market standards: Hagan's approximation, and a Monte Carlo simulation.

Date: 2024-04
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2404.01522 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2404.01522

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().