Approximate pricing of swaptions in affine and quadratic models

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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.
Lingua originaleInglese
pagine (da-a)1325-1345
Numero di pagine21
RivistaQuantitative Finance
Volume17
Numero di pubblicazione9
DOI
Stato di pubblicazionePubblicato - 2017

Keywords

  • Affine quadratic models
  • Bounds
  • Economics, Econometrics and Finance (all)2001 Economics, Econometrics and Finance (miscellaneous)
  • Finance
  • Fourier transform
  • Pricing
  • Swaptions

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