A flexible matrix Libor model with smiles
Pricing of Securities
2012-03-22 v1 Computational Finance
Abstract
We present a flexible approach for the valuation of interest rate derivatives based on Affine Processes. We extend the methodology proposed in Keller-Ressel et al. (2009) by changing the choice of the state space. We provide semi-closed-form solutions for the pricing of caps and floors. We then show that it is possible to price swaptions in a multifactor setting with a good degree of analytical tractability. This is done via the Edgeworth expansion approach developed in Collin-Dufresne and Goldstein (2002). A numerical exercise illustrates the flexibility of Wishart Libor model in describing the movements of the implied volatility surface.
Cite
@article{arxiv.1203.4786,
title = {A flexible matrix Libor model with smiles},
author = {José Da Fonseca and Alessandro Gnoatto and Martino Grasselli},
journal= {arXiv preprint arXiv:1203.4786},
year = {2012}
}