Risk glossary

 

Stochastic alpha beta rho (SABR) model

The stochastic alpha beta rho model is a stochastic volatility model for forward prices commonly used in the modelling of interest rate derivatives. The alpha, beta and rho in the name are parameters to be calibrated. Alpha describes the magnitude of the volatility in the price of the underlying asset; beta describes the sensitivity of forward price movements to the spot price; and rho describes the correlation between movements in the forward price and movements in the volatility of the price of the underlying asset. The model first appeared in a 2002 paper by Patrick Hagan, Deep Kumar, Andrew Lesniewski and Diana Woodward.

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