Abstract
In this paper we present an extension of the classical Hull-White framework for pricing single currency exotics, which allows for a more adequate fit to the swaption volatility smile. We first present a general framework based on the HJM model and then make a separability assumption on the instantaneous forward rate volatility, thus enabling a representation of the discount curve in a finite number of Markovian state variables.We show a practical application of this family of models by analyzing calibration and pricing in the case where the forward rate volatility is a linear function of the short rate. By doing so, we provide a novel and parsimonious specification of the Cheyette model. Then for calibration purposes, we develop fast and accurate approximations for European swaptions, based on standard projection and averaging technics. We also improve the usual naive mean state approximation by the use of Gaussian approximations. We give numerical examples.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
