Explicit volatility specification for the linear Cheyette model
M Chibane - Available at SSRN 1995214, 2012 - papers.ssrn.com
Available at SSRN 1995214, 2012•papers.ssrn.com
In this paper we present an extension of the classical Hull-White framework for pricing single
currency exotics, which allows for a more adequate fit to the swaption volatility smile. We first
present a general framework based on the HJM model and then make a separability
assumption on the instantaneous forward rate volatility, thus enabling a representation of the
discount curve in a finite number of Markovian state variables.
currency exotics, which allows for a more adequate fit to the swaption volatility smile. We first
present a general framework based on the HJM model and then make a separability
assumption on the instantaneous forward rate volatility, thus enabling a representation of the
discount curve in a finite number of Markovian state variables.
Abstract
In this paper we present an extension of the classical Hull-White framework for pricing single currency exotics, which allows for a more adequate fit to the swaption volatility smile. We first present a general framework based on the HJM model and then make a separability assumption on the instantaneous forward rate volatility, thus enabling a representation of the discount curve in a finite number of Markovian state variables.
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