Fast swaption pricing in Gaussian term structure models

DOI10.1111/MAFI.12077MaRDI QIDQ2831010zbMATH OpenOpenAlexFDO

Authors Jaehyuk Choi, Sungchan Shin

Publication date 1 November 2016

Published in Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1803.08803

zbMATH Keywords

fast swaption pricingGaussian term structure modelswaption analyticsvolatility surface calibration

Mathematics Subject Classification ID

Gaussian processes (60G15) Numerical integration (65D30) Derivative securities (option pricing, hedging, etc.) (91G20) Interest rates, asset pricing, etc. (stochastic models) (91G30) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: We propose a fast and accurate numerical method for pricing European swaptions in multi-factor Gaussian term structure models. Our method can be used to accelerate the calibration of such models to the volatility surface. The pricing of an interest rate option in such a model involves evaluating a multi-dimensional integral of the payoff of the claim on a domain where the payoff is positive. In our method, we approximate the exercise boundary of the state space by a hyperplane tangent to the maximum probability point on the boundary and simplify the multi-dimensional integration into an analytical form. The maximum probability point can be determined using the gradient descent method. We demonstrate that our method is superior to previous methods by comparing the results to the price obtained by numerical integration.

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Cites work

• An equilibrium characterization of the term structure
• Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation
• Numerical approximation of the implied volatility under arithmetic Brownian motion
• PRICING COUPON-BOND OPTIONS AND SWAPTIONS IN AFFINE TERM STRUCTURE MODELS
• Pricing interest-rate-derivative securities
• PRICING SWAPTIONS AND COUPON BOND OPTIONS IN AFFINE TERM STRUCTURE MODELS
• Stochastic duration and fast coupon bond option pricing in multi-factor models
• Transform Analysis and Asset Pricing for Affine Jump-diffusions

Cited in

(8)

• Pricing CIR yield options by conditional moment matching
• Pricing swaptions under multifactor Gaussian HJM models
• Swaption pricing in affine and other models
• scientific article; zbMATH DE number 5305363 (Why is no real title available?)
• Pricing Asian-style interest rate swaps within a multi-factor Gaussian HJM framework
• Uncertain interest rate model for Shanghai interbank offered rate and pricing of American swaption
• Pricing and Hedging of Swaptions: Setting up a Pricer of Interest Rate Swaptions
• American barrier swaption pricing problem of exponential Ornstein-Uhlenbeck model in uncertain financial market

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