Analytical Pricing of Swaption in Affine Term Structures with Stochastic Volatility

20 Pages Posted: 20 Apr 2017

See all articles by Massoud Heidari

Massoud Heidari

Caspian Capital Management, LLC

Ali Hirsa

Columbia University - Department of Industrial Engineering and Operations Research (IEOR)

Dilip B. Madan

University of Maryland

Date Written: January 10, 2010

Abstract

In an affine term structure framework with stochastic volatility, we derive the characteristic function of the log swap rate. Having the characteristic function, we employ Fast Fourier Techniques (FFT) to price swaptions. Using ten years of swap rates and swaption premiums, model parameters are estimated using square-root unscented Kalman filter. We investigate the relationship between model premiums and interest rate factors, as well as market premiums and interest factors to conclude that long-dated swaptions are highly correlated to the shape of the curve.

Keywords: Affine Term Structure Models; Charateristic Function; FFT; Swaptions; Straddles

JEL Classification: C

Suggested Citation

Heidari, Massoud and Hirsa, Ali and Madan, Dilip B., Analytical Pricing of Swaption in Affine Term Structures with Stochastic Volatility (January 10, 2010). Available at SSRN: https://ssrn.com/abstract=2955793 or http://dx.doi.org/10.2139/ssrn.2955793

Massoud Heidari

Caspian Capital Management, LLC ( email )

New York, NY 10151
United States
212-703-0300 (Phone)
212-703-0310 (Fax)

Ali Hirsa (Contact Author)

Columbia University - Department of Industrial Engineering and Operations Research (IEOR) ( email )

331 S.W. Mudd Building
500 West 120th Street
New York, NY 10027
United States

HOME PAGE: http://ieor.columbia.edu/ali-hirsa

Dilip B. Madan

University of Maryland

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