A robust stochastic volatility model for interest rates

A swaption pricing model based on a single-factor Cheyette model is shown to fit accurately


Artur Sepp and Parviz Rakhmonov introduce the lognormal stochastic volatility model for the dynamics of interest rates in the single-factor Cheyette model. They show that, unlike models that mix local rate dynamics with zero-correlated volatility dynamics, their model is robust, and they derive closed-form approximate and very accurate solutions for valuation of swaptions and for model calibration to market data, respectively. The model is able to fit market

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