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The SABR Model : Calibrated for Swaption's Volatility Smile / SABR Modellen : Kalibrerad för Swaptioner med Volatilitetsleende

Problem: The standard Black-Scholes framework cannot incorporate the volatility smiles usually observed in the markets. Instead, one must consider alternative stochastic volatility models such as the SABR. Little research about the suitability of the SABR model for Swedish market (swaption) data has been found. Purpose: The purpose of this paper is to account for and to calibrate the SABR model for swaptions trading on the Swedish market. We intend to alter the calibration techniques and parameter values to examine which method is the most consistent with the market. Method: In MATLAB, we investigate the model using two different minimization techniques to estimate the model’s parameters. For both techniques, we also implement refinements of the original SABR model. Results and Conclusion: The quality of the fit relies heavily on the underlying data. For the data used, we find superior fit for many different swaption smiles. In addition, little discrepancy in the quality of the fit between methods employed is found. We conclude that estimating the α parameter from at-the-money volatility produces slightly smaller errors than using minimization techniques to estimate all parameters. Using refinement techniques marginally increase the quality of the fit.

Identiferoai:union.ndltd.org:UPSALLA1/oai:DiVA.org:mdh-24627
Date January 2014
CreatorsTran, Nguyen, Weigardh, Anton
PublisherMälardalens högskola, Akademin för utbildning, kultur och kommunikation, Mälardalens högskola, Akademin för utbildning, kultur och kommunikation
Source SetsDiVA Archive at Upsalla University
LanguageEnglish
Detected LanguageEnglish
TypeStudent thesis, info:eu-repo/semantics/bachelorThesis, text
Formatapplication/pdf
Rightsinfo:eu-repo/semantics/openAccess

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