Cutting Edge introduction: SABR rattling

SABR rattling

mathematics

A basic rule of probabilities – leaving aside some esoteric, contrarian lines of thought in academic literature – is that they are positive numbers. But there is a curious defect in the standard way of generating volatility smiles for the stochastic alpha beta rho (SABR) model that is the industry benchmark for interest rate options – it can imply negative probabilities for the underlying to fall below very low strikes.

In the pre-crisis days of 5% Libor, this could be dismissed as an irrelevant

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact [email protected] or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact [email protected] to find out more.

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: