Free Boundary SABR with Arbitrage-Free Finite Difference Methods

Posted: 13 Feb 2016

Date Written: March 1, 2015

Abstract

This paper applies finite difference schemes to the free-boundary SABR problem that allows negative rates without shift. We reuse Hagan’s arbitrage free PDE approach, and briefly discuss the behavior of this alternate SABR model.

Keywords: stochastic volatility, SABR, TR-BDF2, Crank-Nicolson, finite difference, finance

Suggested Citation

Le Floc'h, Fabien, Free Boundary SABR with Arbitrage-Free Finite Difference Methods (March 1, 2015). Available at SSRN: https://ssrn.com/abstract=2731359

Fabien Le Floc'h (Contact Author)

Calypso Technology ( email )

106 rue de la Boetie
Paris, 75008
France

Independent ( email )

France

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