Approximations of bond and swaption prices in a Black-Karasiński model

DOI10.1142/S0219024916500175MaRDI QIDQ2806362zbMATHOpenAlexFDO

Authors Andrzej Daniluk, Rafał Muchorski

Publication date 17 May 2016

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1506.00697

zbMATH Keywords

stochastic processesderivative pricingKarhunen-Loève expansionBlack-Karasiński model

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Abstract: We derive semi-analytic approximation formulae for bond and swaption prices in a Black-Karasi'{n}ski interest rate model. Approximations are obtained using a novel technique based on the Karhunen-Lo`{e}ve expansion. Formulas are easily computable and prove to be very accurate in numerical tests. This makes them useful for numerically efficient calibration of the model.

Recommendations

• An effective approximation for zero-coupon bonds and Arrow-Debreu prices in the Black-Karasinski model
• Approximate Formulas for Zero‐coupon Bonds
• scientific article; zbMATH DE number 6290829
• A new approximate swaption formula in the LIBOR market model: an asymptotic expansion approach
• Approximate pricing of swaptions in affine and quadratic models

Cites work

• scientific article; zbMATH DE number 192908 (Why is no real title available?)
• Approximate Formulas for Zero‐coupon Bonds
• THE EXPONENT EXPANSION: AN EFFECTIVE APPROXIMATION OF TRANSITION PROBABILITIES OF DIFFUSION PROCESSES AND PRICING KERNELS OF FINANCIAL DERIVATIVES

Cited in

(6)

• Closed-form Arrow-Debreu pricing for the Hull-White short rate model
• scientific article; zbMATH DE number 6290829 (Why is no real title available?)
• Small-time asymptotics for Gaussian self-similar stochastic volatility models
• Approximate Formulas for Zero‐coupon Bonds
• A path-integral approximation for non-linear diffusions
• An effective approximation for zero-coupon bonds and Arrow-Debreu prices in the Black-Karasinski model

This page was built for publication: Approximations of bond and swaption prices in a Black-Karasiński model

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2806362)