Time-changed Levy LIBOR market model: Pricing and joint estimation of the cap surface and swaption cube

• 成果类型: Article
• 署名作者: Leippold, Markus; Stromberg, Jacob
• 署名单位: University of Zurich
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2013.08.016
• 发表日期: 2014
• 页码: 224-250
• 关键词: LIBOR market models; Time-changed Levy process; Caps volatilities; Swaption cube; Unscented Kalman filter

摘要

We propose a novel time-changed Levy LIBOR (London Interbank Offered Rate) market model for jointly pricing of caps and swaptions. The time changes are split into three components. The first component allows matching the volatility term structure, the second generates stochastic volatility, and the third accommodates for stochastic skew. The parsimonious model is flexible enough to accommodate the behavior of both caps and swaptions. For the joint estimation we use a comprehensive data set spanning the financial crisis of 2007-2010. We find that, even during this period, neither market is as fragmented as suggested by the previous literature. (C) 2013 Elsevier B.V. All rights reserved.