Abstract
This paper proposes new bounds on the prices of European-style swaptions for affine and quadratic interest rate models. These bounds are computable whenever the joint characteristic function of the state variables is known. In particular, our lower bound involves the computation of a one-dimensional Fourier transform independently of the swap length. In addition, we control the error of our method by providing a new upper bound on swaption price that is applicable to all considered models. We test our bounds on different affine models and on a quadratic Gaussian model. We also apply our procedure to the multiple curve framework. The bounds are found to be accurate and computationally efficient.
| Original language | English |
|---|---|
| Pages (from-to) | 1325-1345 |
| Number of pages | 21 |
| Journal | Quantitative Finance |
| Volume | 17 |
| Issue number | 9 |
| DOIs | |
| Publication status | Published - 2 Sept 2017 |
Keywords
- Affine quadratic models
- Bounds
- Fourier transform
- Pricing
- Swaptions
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