APPROXIMATIONS OF BOND AND SWAPTION PRICES IN A BLACK–KARASIŃSKI MODEL

We derive semi-analytic approximation formulae for bond and swaption prices in a Black–Karasiński (BK) interest rate model. Approximations are obtained using a novel technique based on the Karhunen–Loève expansion. Formulas are easily computable and prove to be very accurate in numerical tests. This...

Full description

Saved in:
Bibliographic Details
Published in:International journal of theoretical and applied finance 2016-05, Vol.19 (3), p.1650017
Main Authors: DANILUK, ANDRZEJ, MUCHORSKI, RAFAŁ
Format: Article
Language:English
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We derive semi-analytic approximation formulae for bond and swaption prices in a Black–Karasiński (BK) interest rate model. Approximations are obtained using a novel technique based on the Karhunen–Loève expansion. Formulas are easily computable and prove to be very accurate in numerical tests. This makes them useful for numerically efficient calibration of the model.
ISSN:0219-0249
1793-6322
DOI:10.1142/S0219024916500175