Explicit local volatility formula for Cheyette-type interest rate models

Alexander Gairat, Vyacheslav Gorovoy and Vadim Shcherbakov

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Abstract: We derive an explicit analytical approximation for the local volatility function in the Cheyette interest rate model, extending the classical Dupire framework to fixed-income markets. The result expresses local volatility in terms of time and strike derivatives of the Bachelier implied variance, naturally generalizes to multi-factor Cheyette models, and provides a practical tool for model calibration.

Date: 2025-06
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2506.23876

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