Pricing Convexity Adjustment with Wiener Chaos

FMG Dp351

22 Pages Posted: 21 Mar 2001  

Eric Benhamou

A.I. Square Connect; LAMSADE- Paris Dauphine University

Date Written: April 2000

Abstract

This paper presents an approximated formula of the convexity adjustment of Constant Maturity Swap rates, using Wiener Chaos expansion, for multi-factor lognormal zero coupon models.

We derive closed formulae for CMS bond and swap and apply results to various well-known one-factor models (Ho and Lee (1986), Amin and Jarrow (1992), Hull and White (1990), Mercurio and Moraleda (1996)). Quasi Monte Carlo simulations confirm the efficiency of the approximation. Its precision relies on the importance of second and higher order terms.

JEL Classification: G12, G13

Suggested Citation

Benhamou, Eric, Pricing Convexity Adjustment with Wiener Chaos (April 2000). FMG Dp351. Available at SSRN: https://ssrn.com/abstract=257208 or http://dx.doi.org/10.2139/ssrn.257208

Eric Benhamou (Contact Author)

A.I. Square Connect ( email )

35 Boulevard d'Inkermann
Neuilly sur Seine, 92200
France

LAMSADE- Paris Dauphine University ( email )

Place du Marechal de Lattre de Tassigny
Pais, 75016
France

HOME PAGE: http://https://www.lamsade.dauphine.fr/

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