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Asian Review of Financial Research, Vol., No..
pp.253~273
pp.253~273
Fast swaption pricing in Gaussian term structure model
Jaehyuk Choi 8345 NW 66 ST #B4381, MIAMI, FL 33166, USA
Sungchan Shin Address correspondence to Sungchan Shin, Department of Mathematical Sciences, KAIST
We propose a fast and accurate numerical method to price European swaptions in a multi-factor Gaussian term structure model that can speed up the calibration to the volatility surface. Pricing an interest rate option in such a multi-factor term structure model involves evaluating a multi-dimensional integration of the underlying claim's payo on a domain where the payo is positive. In our method, we approximate the exercise boundary of the state variables as a hyperplane tangent to the maximum probability point on the boundary and simplify the multi-dimensional integration into an analytic form. The maximum probability point can be found using the gradient descent method. We show that the quality of our method is superior to the result of previous studies by directly comparing them to the exact price obtained from the numerical integration.
Jaehyuk Choi
Sungchan Shin
We propose a fast and accurate numerical method to price European swaptions in a multi-factor Gaussian term structure model that can speed up the calibration to the volatility surface. Pricing an interest rate option in such a multi-factor term structure model involves evaluating a multi-dimensional integration of the underlying claim's payo on a domain where the payo is positive. In our method, we approximate the exercise boundary of the state variables as a hyperplane tangent to the maximum probability point on the boundary and simplify the multi-dimensional integration into an analytic form. The maximum probability point can be found using the gradient descent method. We show that the quality of our method is superior to the result of previous studies by directly comparing them to the exact price obtained from the numerical integration.
Gaussian term structure model,volatility surface calibration,fast swaption pricing,swaption analytics