Improving Swaption Calibration in Factor HJM Stochastic Volatility Models: A First-Order Correction to Frozen Swap-Rate Loadings

Bram Brongers

Papers from arXiv.org

Abstract: The factor HJM stochastic volatility model introduced by Sepp and Rakhmonov (2025) obtains tractable swaption pricing by freezing the nonlinear swap-rate loading along a deterministic expected-state path. This removes the dependence of conditional swap-rate variance on the current yield-curve state. We introduce a first-order Taylor correction to the loading that adds no calibration parameters. Conditional on retaining the frozen annuity-measure drift, we show that the first variation of the swap-rate transform is affine in the centered rate states and reduces to one-dimensional equations in volatility. For quadratic-drift lognormal stochastic volatility, these equations yield a finite-dimensional ODE representation and a direct log-volatility formulation. Calibrations to independently generated nonlinear-model prices show substantially lower stochastic volatility parameter bias and held-out pricing error, with only modest changes in local calibration identifiability.

Date: 2026-08
References: Add references at CitEc
Citations:

Downloads: (external link)
https://arxiv.org/pdf/2608.29423 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:2608.29423

Access Statistics for this paper

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