SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
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surya2cents
Topic Author
Posts: 185
Joined: January 30th, 2009, 8:04 pm

Patching SABR

February 21st, 2014, 4:58 am

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?
 
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Pat
Posts: 1207
Joined: September 30th, 2001, 2:08 am

Patching SABR

February 21st, 2014, 11:19 am

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.
 
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cemil
Posts: 221
Joined: September 16th, 2005, 7:44 am

Patching SABR

February 21st, 2014, 12:56 pm

I can suggest a paper here and hereand here
Last edited by cemil on February 20th, 2014, 11:00 pm, edited 1 time in total.
 
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Alan
Posts: 10167
Joined: December 19th, 2001, 4:01 am
Location: California
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Patching SABR

February 21st, 2014, 2:32 pm

Also, this thread has some comments that may be relevant.
Last edited by Alan on February 20th, 2014, 11:00 pm, edited 1 time in total.
 
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surya2cents
Topic Author
Posts: 185
Joined: January 30th, 2009, 8:04 pm

Patching SABR

February 21st, 2014, 2:49 pm

Thanks Pat, look forward to reading that upcoming article. Thank you - cemll and Alan, my weekend is going to be busy!
 
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surya2cents
Topic Author
Posts: 185
Joined: January 30th, 2009, 8:04 pm

Patching SABR

February 22nd, 2014, 2:17 pm

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!
Last edited by surya2cents on February 21st, 2014, 11:00 pm, edited 1 time in total.
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