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arXiv · 1203.4786

A flexible matrix Libor model with smiles

José Da Fonseca·Alessandro Gnoatto·Martino Grasselli
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Abstract

We present a flexible approach for the valuation of interest rate derivatives based on Affine Processes. We extend the methodology proposed in Keller-Ressel et al. (2009) by changing the choice of the state space. We provide semi-closed-form solutions for the pricing of caps and floors. We then show that it is possible to price swaptions in a multifactor setting with a good degree of analytical tractability. This is done via the Edgeworth expansion approach developed in Collin-Dufresne and Goldstein (2002). A numerical exercise illustrates the flexibility of Wishart Libor model in describing the movements of the implied volatility surface.

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José Da Fonseca, Alessandro Gnoatto, Martino Grasselli. 2012-03-21. A flexible matrix Libor model with smiles. https://arxiv.org/abs/1203.4786

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