Pricing convexity adjustment with Wiener chaos

Eric Benhamou

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper presents an approximated formula of the convexity adjustment of Constant Maturity Swap rates, using Wiener Chaos expansion, for multi-factor lognormal zero coupon models. We derive closed formulae for CMS bond and swap and apply results to various well-known one-factor models (Ho and Lee (1986), Amin and Jarrow(1992), Hull and White (1990), Mercurio and Moraleda (1996)). Quasi Monte Carlo simulations confirm the efficiency of the approximation. Its precision relies on the importance of second and higher order terms.

Keywords: Wiener chaos; Girsanov; convexity adjustment; CMS; lognormal zero-coupon bonds models (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2000-04-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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