Approximate option pricing in the Lévy Libor model

DOI10.1007/978-3-319-45875-5_19MaRDI QIDQ4976512zbMATH OpenOpenAlexFDO

Authors Zorana Grbac, David Krief, Peter Tankov

Publication date 31 July 2017

Published in Springer Proceedings in Mathematics & Statistics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1511.08466

zbMATH Keywords

asymptotic approximationcapletLibor market modelLévy Libor modelswaption

Mathematics Subject Classification ID

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

Abstract: In this paper we consider the pricing of options on interest rates such as caplets and swaptions in the L'evy Libor model developed by Eberlein and "Ozkan (2005). This model is an extension to L'evy driving processes of the classical log-normal Libor market model (LMM) driven by a Brownian motion. Option pricing is significantly less tractable in this model than in the LMM due to the appearance of stochastic terms in the jump part of the driving process when performing the measure changes which are standard in pricing of interest rate derivatives. To obtain explicit approximation for option prices, we propose to treat a given L'evy Libor model as a suitable perturbation of the log-normal LMM. The method is inspired by recent works by Cern'y, Denkl and Kallsen (2013) and M'enass'e and Tankov (2015). The approximate option prices in the L'evy Libor model are given as the corresponding LMM prices plus correction terms which depend on the characteristics of the underlying L'evy process and some additional terms obtained from the LMM model.

Recommendations

• The Lévy LIBOR model
• Option pricing for a stochastic volatility Lévy model with stochastic interest rates
• On the valuation of compositions in Lévy term structure models
• A new approximate swaption formula in the LIBOR market model: an asymptotic expansion approach
• A cross-currency Lévy market model

Cites work

• A didactic note on affine stochastic volatility models
• A jump-diffusion Libor model and its robust calibration
• Calibration of Lévy term structure models
• scientific article; zbMATH DE number 2241893 (Why is no real title available?)
• Jump-adapted discretization schemes for Lévy-driven SDEs
• Robust Libor Modelling and Pricing of Derivative Products
• SELF-DECOMPOSABILITY AND OPTION PRICING
• Smart expansion and fast calibration for jump diffusions
• The Lévy LIBOR model
• The Market Model of Interest Rate Dynamics
• Time dependent Heston model

Cited in

(8)

• Approximate-analytical solution to the information measure's based quanto option pricing model
• The Lévy LIBOR model
• On the valuation of compositions in Lévy term structure models
• Approximating Lévy processes with a view to option pricing
• Computation of Greeks in LIBOR models driven by time–inhomogeneous Lévy processes
• Approximate Pricing of Call Options on the Quadratic Variation in Lévy Models
• Pricing of LIBOR futures by martingale method in Cox-Ingersoll-Ross model
• A Weak MLMC Scheme for Lévy-Copula-Driven SDEs with Applications to the Pricing of Credit, Equity and Interest Rate Derivatives

This page was built for publication: Approximate option pricing in the Lévy Libor model

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q4976512)