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by Hasek
February 27th, 2022, 9:22 pm
Forum: General Forum
Topic: Calibration of a volatility smile model on a partial smile
Replies: 4
Views: 3976

Re: Calibration of a volatility smile model on a partial smile

Yeah it's probably worth elaborating on it a little bit more... So I'm talking about a market where there is only one significant market maker providing indicative quotes for caps/floors and there are usually no more than 2-3 trades made per week, so there is no opportunity to calibrate a model to r...
by Hasek
February 24th, 2022, 8:43 am
Forum: General Forum
Topic: Calibration of a volatility smile model on a partial smile
Replies: 4
Views: 3976

Calibration of a volatility smile model on a partial smile

I'm using a well-known SABR model in order to build an implied volatility surface of caps/floors on a very illiquid market which is entirely missing OTM quotes. What happens to SABR implied smile/surface calibrated only on ITM and ATM quotes? I think that it's going to somehow underestimate/overest...
by Hasek
February 7th, 2022, 10:25 pm
Forum: General Forum
Topic: Implied volatility surface of an average rate Asian caps
Replies: 2
Views: 2700

Implied volatility surface of an average rate Asian caps

Lets say I have a SABR model where implied volatility is given by semi-analytical Hagan et al. formulas and individual caplets are priced with analytical Black formulas. This model allows me to interpolate an implied volatility surface of vanilla European caps once calibrated on vanilla European cap...
by Hasek
December 9th, 2021, 3:16 pm
Forum: General Forum
Topic: Statistical metric to measure how well does the volatility surface fit the market
Replies: 2
Views: 2184

Re: Statistical metric to measure how well does the volatility surface fit the market

UPD: Does it make more sense to pick a squared sum of differences across all tenors and strikes as a metric?

$$\rho = \sum\limits_{K,T}(\sigma^{market}-\sigma^{model})^2$$
by Hasek
December 9th, 2021, 2:21 pm
Forum: General Forum
Topic: Statistical metric to measure how well does the volatility surface fit the market
Replies: 2
Views: 2184

Statistical metric to measure how well does the volatility surface fit the market

Suppose that I have a model for implied volatility surface and want to figure out required recalibration frequency based on historical quotes. Since I have a large range of strikes and tenors over a long period of time I need to somehow automate this process, i.e. I need a computable metric rather ...
by Hasek
November 19th, 2021, 11:14 am
Forum: General Forum
Topic: Interest Rates Options: can't reproduce market premiums given volatilities and discount curve
Replies: 5
Views: 2650

Re: Interest Rates Options: can't reproduce market premiums given volatilities and discount curve

Which formula would you say is a standard market convention? Should one use the continuous compounding?
$$F(t_1,t_2) = \frac{1}{t_2-t_1}\left(\ln P(t_1) -\ln P(t_2)\right) = \frac{R(t_2)t_2 - R(t_1)t_1}{t_2 - t_1}$$
by Hasek
November 16th, 2021, 9:36 am
Forum: General Forum
Topic: Interest Rates Options: can't reproduce market premiums given volatilities and discount curve
Replies: 5
Views: 2650

Re: Interest Rates Options: can't reproduce market premiums given volatilities and discount curve

As best as I can tell, your forward rates are badly wrong. That’s good news, since that should be easy to fix. What made you think so? These forwards were calculated from the given zero rates via the following formula $$F(t_1, t_2) = \frac{1}{t_2-t_1}\left(\frac{1+R(t_2)t_2}{1+R(t_1)t_1}-1\right)$$...
by Hasek
November 15th, 2021, 3:49 pm
Forum: General Forum
Topic: Interest Rates Options: can't reproduce market premiums given volatilities and discount curve
Replies: 5
Views: 2650

Interest Rates Options: can't reproduce market premiums given volatilities and discount curve

I have a range of premiums and normal (Bachelier) volatilites quotes across several strikes and maturities for caps and floors and trying to figure out why I cannot reprice them given the discount curve data. Let me start with a brief theory review. A cap (floor) is a series of caplets (floorlets) w...
by Hasek
November 6th, 2021, 3:33 pm
Forum: General Forum
Topic: No-arbitrage conditions on a caps/floors volatility surface
Replies: 1
Views: 2954

No-arbitrage conditions on a caps/floors volatility surface

Suppose that one has a caps/floors volatility surface and wants to check whether this surface admits arbitrage. What is the theoretical and practical way to do it? Lets talk only about caps for simplicity, since a cap and a floor with the same strike and expiry have the same volatility (similarly to...