Interest Rate Caps "Smile" Too ! But Can't The LIBOR Market Models Capture The Smile ?  

Oleh:

Jarrow, Robert ; Haitao, Li ; Feng, Zhao

Jenis: Article from Journal - ilmiah internasional
Dalam koleksi: The Journal of Finance (EBSCO) vol. 62 no. 1 (Feb. 2007), page 345-382.
Topik: MARKETS; interest rates; volatility; capital markets; stochastic models; stock prices; studies
Fulltext: p 345.pdf (1.4MB)

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Perpustakaan Pusat (Semanggi) Nomor Panggil: JJ88 Non-tandon: 1 (dapat dipinjam: 0) Tandon: tidak ada

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Isi artikel

Using 3 years of interest rate caps price data, we provide a comprehensive documentation of volatility smiles in the caps market. To capture the volatility smiles, we develop a multifactor term structure model with stochastic volatility and jumps that yields a closed - form formula for cap prices. We show that although a three - factor stochastic volatility model can price at - the - money caps well, significant negative jumps in interest rates are needed to capture the smile. The volatility smile contains information that is not available using only at-the-money caps, and this information is important for understanding term structure models.

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