Approximate Pricing of Swaptions in Affine and Quadratic Models
39 Pages Posted: 15 Sep 2015 Last revised: 9 Jul 2016
Date Written: July 1, 2016
This paper proposes new bounds on the prices of European-style swaptions for affine and quadratic interest rate models. These bounds are computable whenever the joint characteristic function of the state variables is known. In particular, our lower bound involves the computation of a one dimensional Fourier transform independently of the swap length. In addition, we control the error of our method by providing a new upper bound on swaption price applicable to all considered models. We test our bounds on different affine models and on a quadratic Gaussian model. We also apply our procedure to the multiple curve framework. The bounds are found to be accurate and computationally efficient.
Keywords: Pricing, swaptions, affine-quadratic models, Fourier transform, bounds
JEL Classification: G12 G13
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