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A General Stochastic Volatility Model for the Pricing and Forecasting of Interest Rate Derivatives / Anders B. Trolle, Eduardo S. Schwartz.
- Format:
- Book
- Author/Creator:
- Trolle, Anders B.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w12337.
- NBER working paper series no. w12337
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2006.
- Summary:
- We develop a tractable and flexible stochastic volatility multi-factor model of the term structure of interest rates. It features correlations between innovations to forward rates and volatilities, quasi-analytical prices of zero-coupon bond options and dynamics of the forward rate curve, under both the actual and risk-neutral measure, in terms of a finite-dimensional affine state vector. The model has a very good fit to an extensive panel data set of interest rates, swaptions and caps. In particular, the model matches the implied cap skews and the dynamics of implied volatilities. The model also performs well in forecasting interest rates and derivatives.
- Notes:
- Print version record
- June 2006.
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