Options on Bonds: Implied Volatilities from Affine Short-Rate Dynamics

2021/06/08 by Matthew Lorig, Lorig, Matthew, Natchanon Suaysom +1
Economics, Econometrics and Finance · #FOS: Economics and business #Mathematical Finance (q-fin.MF) #q-fin.MF

paper · pdf · doi:10.48550/arxiv.2106.04518

28 pages, 6 figures

arxiv created 2021/06/08 · arxiv updated 2021/06/09

Abstract

We derive an explicit asymptotic approximation for the implied volatilities of Call options written on bonds assuming the short-rate is described by an affine short-rate model. For specific affine short-rate models, we perform numerical experiments in order to gauge the accuracy of our approximation.

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