International Journal of Theoretical and Applied Finance · 2004 · 17 citations · 7 references
BusinessEconomicsFinanceAsset PricingFinancial EconomicsStochastic ProcessesAsset Pricing EmpiricsImplied VolatilityOption PricingOption Pricing ModelsStochastic VolatilityVolatility ModelingCalibration Of Volatility ModelsLibor Market ModelOption Pricing Under Stochastic Interest RatesOption Pricing Under Stochastic VolatilityStochastic Volatility ModelsStochastic Volatility PricingTime-varying Volatility ModelsVolatility Regimes
We propose a two-regime stochastic volatility extension of the LIBOR market model that preserves the positive features of the recently introduced (Joshi and Rebonato 2001) stochastic-volatility LIBOR market model (ease of calibration to caplets and swaptions, efficient pricing of complex derivatives, etc.) and overcomes most of its shortcomings. We show the improvements by analyzing empirically and theoretically the real and the model-produced change sin swaption implied volatility.
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