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Pricing Bermudan Swaptions in a Stochastic-Volatility LIBOR Market Model ⁄
| Content Provider | Semantic Scholar |
|---|---|
| Author | Valchev, Stoyan Matache, Ana-Maria |
| Copyright Year | 2004 |
| Abstract | This paper introduces a time-inhomogeneous parameterization of the forward LIBOR volatilities and analyzes its implications for the valuation of Bermudan swaptions. The model approximates the actual term structure of volatilities with a curve from a given set deflned by the parametric volatility speciflcation and the structure of a continuous time Markov chain that modulates the volatility function. The flrst stochastic volatility speciflcation generates jump discontinuities in volatility and shape-preserving evolution of the volatility term structure in the future. The second speciflcation allows, in addition, for changes in the shape of the volatility curve. Simulated values of Bermudan swaptions in a LIBOR market model with these volatility structures were obtained and compared to the prices from standard deterministic volatility speciflcations. The model allows for the assessment of the forward volatility risk of Bermudan swaptions. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://www.nccr-finrisk.uzh.ch/media/pdf/wp/WP147_2.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
