CSA Caps Convexity Impact on Hull & White Calibration

CSA Caps Convexity Impact on Hull & White Calibration, Wilmott Magazine issue 75, Copyright © 2015, Wilmott.

16 Pages Posted: 10 Jul 2013 Last revised: 10 Apr 2015

Date Written: June 15, 2013

Abstract

Prices of CSA instruments are observed in a world which is not natural for LIBOR based payoffs in the sense that LIBOR forward is not martingale under CSA-forward measure. From a theoretical perspective, pricing models for collateralized LIBOR based payoffs should account for CSA-convexity, implied when changing from CSA-forward measure to LIBOR-forward measure. In practice CSA-convexity effect is neglected. In the present paper we show how modeling jointly OIS and LIBOR using one factor guassian short rate dynamics allows to capture CSA-convexity on caps and we measure its impact on LIBOR volatility calibration in the Hull & White case.

Keywords: CSA convexity, Caps Pricing, Hull & White calibration, LIBOR Volatility, OIS Volatility, OIS LIBOR Correlation

Suggested Citation

Papaioannou, Denis, CSA Caps Convexity Impact on Hull & White Calibration (June 15, 2013). CSA Caps Convexity Impact on Hull & White Calibration, Wilmott Magazine issue 75, Copyright © 2015, Wilmott. , Available at SSRN: https://ssrn.com/abstract=2290118 or http://dx.doi.org/10.2139/ssrn.2290118

Denis Papaioannou (Contact Author)

Tenokonda ( email )

London
United Kingdom

HOME PAGE: http://www.tenokonda.com

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