Pricing with a Smile: An Approach Using Normal Inverse Gaussian Distributions with a Sabr-Like Parameterisation
34 Pages Posted: 6 Dec 2011
Date Written: November 10, 2011
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
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