Interest rate models enhanced with local volatility

Lingling Cao and Pierre Henry-Labordère implement Dupire's local volatility in interest rate models

Frustrated man at the blackboard during a maths class

CLICK HERE TO VIEW THE PDF Dupire’s local volatility model, widely used in equity markets, has the property of being perfectly calibrated to vanillas. In fixed income markets, models with a similar property are not available. Recently, Gatarek, Jablecki & Qu (2016) have considered a one-dimensional Cheyette model enhanced with local volatility and have derived an (approximate) Dupire-like local volatility formula for swaptions (see also Chibane & Law (2013), where a quadratic param

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