Pricing with a Smile: An Approach Using Normal Inverse Gaussian Distributions with a Sabr-Like Parameterisation

34 Pages Posted: 6 Dec 2011

See all articles by Xavier Charvet

Xavier Charvet

affiliation not provided to SSRN

Yann Ticot

affiliation not provided to SSRN

Date Written: November 10, 2011

Abstract

This article outlines a few properties of the Normal Inverse Gaussian distribution and demonstrates its ability to fit various shapes of smiles. A parametrization in terms of SABR inputs is derived. A few results related to vanilla options on RPI year-on-year inflation rates, as well as caplets on CHF Libor rates are exposed. Finally, further applications for multi-asset option pricing are considered when the NIG distribution is combined with a copula pricing framework.

Keywords: Normal Inverse Gaussian, NIG, Levy process, SABR, smile, inflation, year-on-year rate

Suggested Citation

Charvet, Xavier and Ticot, Yann, Pricing with a Smile: An Approach Using Normal Inverse Gaussian Distributions with a Sabr-Like Parameterisation (November 10, 2011). Available at SSRN: https://ssrn.com/abstract=1968453 or http://dx.doi.org/10.2139/ssrn.1968453

Xavier Charvet (Contact Author)

affiliation not provided to SSRN ( email )

Yann Ticot

affiliation not provided to SSRN ( email )

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