Implied Volatilities of Caps: a Gaussian approach

Flavio Angelini and Stefano Herzel

No 09/2005, Quaderni del Dipartimento di Economia, Finanza e Statistica from Università di Perugia, Dipartimento Economia

Abstract: Implied volatilities of interest rate derivatives present some distinctive features, like the inverse relation with the underlying rates and the humped or decreasing shape of their term structure. The objective of this paper is to analyze and explain such features in a Gaussian framework. We will use an approximate relation which separates in a simple and natural way the effects on the implied volatility of the level and of the uncertainty of the interest rates. This is a useful tool for understanding the features of different models and to interpret some characteristics of the market.

Keywords: Implied volatility; forward rates; HJM models; calibration (search for similar items in EconPapers)
JEL-codes: C13 E43 (search for similar items in EconPapers)
Date: 2005-05-31
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Citations: View citations in EconPapers (7)

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