SABR goes normal

SABR goes normal

falling rates

The stochastic alpha beta rho (SABR) model is the industry standard for interest rate derivatives. However, it was designed at a time when most curves were at much higher levels than today’s ultra-low-rate environment. Problems with its implementation, through the so-called Hagan expansion, such as the breakdown of the expansion for high volatility and the possibility of negative probabilities for very low strikes, did not matter at the time but now constitute a pressing problem for the swaps an

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