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Speedup of Calibration and Pricing with SABR Models: From Equities to Interest Rates Derivatives

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Part of the book series: Springer Proceedings in Mathematics & Statistics ((PROMS,volume 135))

Abstract

In the more classical models for equities and interest rates evolution, constant volatility is usually assumed. However, in practice the volatilities are not constant in financial markets and different models allowing a varying local or stochastic volatility also appear in the literature. Particularly, here we consider the SABR model that has been first introduced in a paper by Hagan and coworkers, where an asymptotic closed-form formula for the implied volatility of European plain-vanilla options with short maturities is proposed. More recently, different works (Mercurio and Morini, Modeling Interest Rates: Advances in Derivatives Pricing, Risk Books 2009; Hagan and Lesniewski, LIBOR market model with SABR style stochastic volatility. Working Paper. http://lesniewski.us/papers/working/SABRLMM.pdf, 2008; Rebonato, A time-homogeneous SABR-consistent extension of the LMM. Risk, 2008) have extended the use of SABR model in the context of LIBOR market models for the evolution of forward rates (SABR-LMM). One drawback of these models in practice comes from the increase of computational cost, mainly due to the growth of model parameters to be calibrated. Additionally, sometimes either it is not always possible to compute an analytical approximation for the implied volatility or its expression results to be very complex, so that numerical methods (for example, Monte Carlo in the calibration process) have to be used. In this work we mainly review some recently proposed global optimization techniques based on Simulated Annealing (SA) algorithms and its implementation on Graphics Processing Units (GPUs) in order to highly speed up the calibration and pricing of different kinds of options and interest rate derivatives. Finally, we present some examples corresponding to real market data.

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Notes

  1. 1.

    \(S_{\mathrm{Black}}(K,\sigma _{a,b}) = \text{Bl}(K,S_{a,b}(0),\sigma _{a,b}\sqrt{T_{a}}, 1)\sum _{i=a}^{b-1}\varDelta tP(0,T_{ i+1})\), where σ a, b is the volatility parameter quoted in the market, Bl is the classical Black–Scholes formula, and P denotes the discount factor.

  2. 2.

    The payoff of the swaption T a × (T b T a ), i.e., with maturity T a and length of the underlying swap T b T a , is \((S_{a,b}(T_{a}) - K)^{+}\sum _{i=a}^{b-1}\varDelta tP(T_{a},T_{ i+1})\), where \(S_{a,b}(T_{a}) = \dfrac{1 -\prod _{j=a}^{b-1} \dfrac{1} {1 +\varDelta tF_{j}(T_{a})}} {\sum _{i=a}^{b-1}\varDelta t\prod _{ j=a}^{i} \dfrac{1} {1 +\varDelta tF_{j}(T_{a})}}\).

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Correspondence to Carlos Vázquez .

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Ferreiro, A.M., García-Rodríguez, J.A., López-Salas, J.G., Vázquez, C. (2015). Speedup of Calibration and Pricing with SABR Models: From Equities to Interest Rates Derivatives. In: Londoño, J., Garrido, J., Hernández-Hernández, D. (eds) Actuarial Sciences and Quantitative Finance. Springer Proceedings in Mathematics & Statistics, vol 135. Springer, Cham. https://doi.org/10.1007/978-3-319-18239-1_4

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