Inflation Models with Correlation and Skew
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arXiv
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| Hauptverfasser: | , |
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| Format: | Preprint |
| Veröffentlicht: |
2024
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| _version_ | 1866914788493230080 |
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| author | Ogetbil, Orcan Hientzsch, Bernhard |
| author_facet | Ogetbil, Orcan Hientzsch, Bernhard |
| contents | We formulate a forward inflation index model with multi-factor volatility structure featuring a parametric form that allows calibration to correlations between indices of different tenors observed in the market. Assuming the nominal interest rate follows a single factor Gaussian short rate model, we present analytical prices for zero-coupon and year-on-year swaps, caps, and floors. The same method applies to any interest rate model for which one can compute the zero-coupon bond prices and measure shifts. We extend the multi-factor model with leverage functions to capture the entire market volatility skew with a single process. The time-consuming calibration step of this model can be avoided in the simplified model that we further propose. We demonstrate the leveraged and the simplified models with market data. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2405_05101 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | Inflation Models with Correlation and Skew Ogetbil, Orcan Hientzsch, Bernhard Mathematical Finance We formulate a forward inflation index model with multi-factor volatility structure featuring a parametric form that allows calibration to correlations between indices of different tenors observed in the market. Assuming the nominal interest rate follows a single factor Gaussian short rate model, we present analytical prices for zero-coupon and year-on-year swaps, caps, and floors. The same method applies to any interest rate model for which one can compute the zero-coupon bond prices and measure shifts. We extend the multi-factor model with leverage functions to capture the entire market volatility skew with a single process. The time-consuming calibration step of this model can be avoided in the simplified model that we further propose. We demonstrate the leveraged and the simplified models with market data. |
| title | Inflation Models with Correlation and Skew |
| topic | Mathematical Finance |
| url | https://arxiv.org/abs/2405.05101 |