Approximate Pricing of Swaptions in Affine and Quadratic Models

39 Pages Posted: 15 Sep 2015 Last revised: 9 Jul 2016

See all articles by Anna Gambaro

Anna Gambaro

University of Piemonte Orientale

Ruggero Caldana

Independent

Gianluca Fusai

Università del Piemonte Orientale Dipartimento di Studi per l'Economia e l'Impresa; Sir John Cass Business School - City, University of London

Date Written: July 1, 2016

Abstract

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

Suggested Citation

Gambaro, Anna and Caldana, Ruggero and Fusai, Gianluca, Approximate Pricing of Swaptions in Affine and Quadratic Models (July 1, 2016). Available at SSRN: https://ssrn.com/abstract=2660696 or http://dx.doi.org/10.2139/ssrn.2660696

Anna Gambaro (Contact Author)

University of Piemonte Orientale ( email )

Dipartimento di Studi per l'Economia e l'Impresa
Via E. Perrone, 18
Novara, 28100

Ruggero Caldana

Independent ( email )

No Address Available

Gianluca Fusai

Università del Piemonte Orientale Dipartimento di Studi per l'Economia e l'Impresa ( email )

Via Perrone, 18
Novara, 28100
Italy

HOME PAGE: http://https://upobook.uniupo.it/gianluca.fusai

Sir John Cass Business School - City, University of London ( email )

106 Bunhill Row
London, EC2Y 8HB
Great Britain

HOME PAGE: http:// www.cass.city.ac.uk/experts/G.Fusai

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