Modelling the South African Inter-Bank Interest Rate Market using a Log-Normal Rational Pricing Kernel Model

Master Thesis

2019

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http://hdl.handle.net/11427/31423
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thesis_com_2019_hammond_graeme.pdf (1.9 MB)
Authors
Hammond, Graeme
Supervisors
Taylor, David
Mahomed, Obeid
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African Institute of Financial Markets and Risk Management
Faculty
Faculty of Commerce
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Abstract
This dissertation examines the performance of two log-normal rational pricing kernel models and their calibration to the South African Inter-bank interest rate market. We investigate using Monte-Carlo simulation to price caps, floors and swaptions. Model-performance for both models was tested on single-strikes and entire volatility surfaces. Our results show that a one-factor model cannot reproduce the volatility smile present in the caps/floor market but can reproduce the at-the money swaption volatility surface. The two-factor model produces a better calibration to the volatility smile and captures most of the characteristics of the volatility surface.
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Mathematical Finance

Reference:

Hammond, G. 2019. Modelling the South African Inter-Bank Interest Rate Market using a Log-Normal Rational Pricing Kernel Model. . ,Faculty of Commerce ,African Institute of Financial Markets and Risk Management. http://hdl.handle.net/11427/31423

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