Abstract

We present a new generic method for constructing correlation parameterizations that are always positive definite, and derive new flexible parametric forms.Furthermore, we use the CMS spread option pricing formula from Kiesel & Lutz to calibrate a stochastic volatility LMM to caplets, swaptions and CMS spread options, and in this way extract the implied correlation information available from the market.We investigate the performance of several correlation parameterizations and compare the implied correlation matrices with the corresponding empirical correlation matrices.

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 call

Disclaimer: 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.