Explicit Caplet Implied Volatilities for Quadratic Term-Structure Models

2022/12/08 by Matthew Lorig, Lorig, Matthew, Natchanon Suaysom +1
Economics, Econometrics and Finance · #FOS: Economics and business #Mathematical Finance (q-fin.MF) #Stochastic processes and financial applications

paper · pdf · doi:10.48550/arxiv.2212.04425

openalex publication_date 2022/12/08 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04

Abstract

We derive an explicit asymptotic approximation for implied volatilities of caplets under the assumption that the short-rate is described by a generic quadratic term-structure model. In addition to providing an asymptotic accuracy result, we perform experiments in order to gauge the numerical accuracy of our approximation.

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