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Patching SABR

Posted: February 21st, 2014, 4:58 am
by surya2cents
The classical SABR runs into trouble at low strikes. Various patches have been proposed. Is there any consensus on what could be considered the best approach?

Patching SABR

Posted: February 21st, 2014, 11:19 am
by Pat
At the moment, I'd suggest Arb Free SABR ... it solves the problem at the expense of numerially solving an effective 1 dimensional PDE. Article should appear in Wilmott shortly. May be a better way soon.

Patching SABR

Posted: February 21st, 2014, 12:56 pm
by cemil
I can suggest a paper here and hereand here

Patching SABR

Posted: February 21st, 2014, 2:32 pm
by Alan
Also, this thread has some comments that may be relevant.

Patching SABR

Posted: February 21st, 2014, 2:49 pm
by surya2cents
Thanks Pat, look forward to reading that upcoming article. Thank you - cemll and Alan, my weekend is going to be busy!

Patching SABR

Posted: February 22nd, 2014, 2:17 pm
by surya2cents
I am also interested in pricing mid curve swaptions. Here a market model such as BGM(LMM) seems to be the way to go since we want to back out a volatility term structure. However, mid curve swaptions also exhibit a skew. So again we end up needing to do a LMM + skew model. Is there a nice unified model, that is also parsimonious ? Or is it too much to ask for!