2016/06/04 by Lin Xiao, Lin, Xiao
Decision Sciences · Economics, Econometrics and Finance · #FOS: Economics and business #Financial Risk and Volatility Modeling #Mathematical Finance (q-fin.MF) #Pricing of Securities (q-fin.PR) #Probability and Risk Models #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.1606.01343
openalex publication_date 2016/06/04 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
The aim of this paper is to present a dual-term structure model of interest rate derivatives in order to solve the two hardest problems in financial modeling: the exact volatility calibration of the entire swaption matrix, and the calculation of bucket vegas for structured products. The model takes a series of long-term zero-coupon rates as basic state variables that are driven directly by one or more Brownian motion. The model volatility is assigned in a matrix form with two terms. A numerical scheme for implementing the model has been developed in the paper. At the end, several examples have been given for the model calibration, the structured products pricing and the calculation of bucket vegas.