Cutting Edge 2013: fixing SABR

Fixing SABR

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During its 11-year existence, the stochastic alpha beta rho (SABR) interest rate model has become the industry standard – but it is not perfect. Faced with record low interest rates over the past couple of years, the model broke, generating nonsensical negative probabilities for ultra-low strikes, and losing accuracy for high strikes and long maturities – the so-called wings (Risk November 2012, pages 22–24). The last year has seen quants looking for a fix.

The focus on SABR is reflected in the

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